Legal Definitions - forward cover

Forward Cover

Forward cover refers to the act of purchasing a specific good or asset (known as a "cash commodity") in order to fulfill a future obligation that has already been agreed upon in a "forward contract." Essentially, it's about securing the physical items you've promised to deliver at a later date, ensuring you can meet your commitment.

• Example 1: Manufacturing Supply Chain

  A custom furniture manufacturer signs a contract with a hotel chain to deliver 300 bespoke dining tables in nine months. The contract specifies a unique, imported type of oak wood. To ensure they can meet this future obligation (the "forward contract") and avoid potential price increases or scarcity of the wood closer to the delivery date, the manufacturer immediately places an order and purchases the required quantity of that specific oak from their timber supplier. This proactive purchase of the oak wood is an example of forward cover.

• Example 2: Agricultural Commodities

  A large juice company enters into a "forward contract" with a major grocery store chain to supply 50,000 gallons of orange juice in six months at a predetermined price. To guarantee they have the necessary raw material, the juice company then secures agreements with orange growers to purchase a specific volume of oranges from the upcoming harvest. This action of locking in the supply of oranges to fulfill their future juice delivery commitment is forward cover.

• Example 3: Specialized Equipment Procurement

  A construction firm wins a bid to build a specialized laboratory, agreeing to install a particular brand of high-tech ventilation system within 12 months. Knowing that this system has a long lead time for manufacturing and delivery, the construction firm immediately places an order and pays for the specific ventilation units with the manufacturer. This purchase, made well in advance to ensure they can meet their contractual obligation to the client, demonstrates forward cover.