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Simple English definitions for legal terms
forward cover
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A quick definition of forward cover:
A forward cover is when someone buys a product to fulfill a promise they made to buy that product in the future. This promise is called a forward contract. A contract is an agreement between two or more people that is legally binding. It can be written down or just agreed upon verbally. When people talk about a contract, they usually mean the agreement, not the physical document.
A more thorough explanation:
Definition: Forward cover refers to the purchase of a cash commodity to fulfill the obligation of a forward contract.
A forward contract is an agreement between two or more parties that creates enforceable obligations. It involves the purchase or sale of an asset at a predetermined price and date in the future. Forward cover is used to fulfill the obligation of a forward contract by purchasing the underlying asset in the cash market.
For example, let's say a company enters into a forward contract to purchase 1,000 barrels of crude oil at $50 per barrel in six months. To fulfill this obligation, the company can purchase 1,000 barrels of crude oil in the cash market at the current market price, which may be higher or lower than the forward price. This purchase of crude oil in the cash market is known as forward cover.
Another example could be a farmer who enters into a forward contract to sell 500 bushels of wheat at $5 per bushel in three months. To fulfill this obligation, the farmer can sell 500 bushels of wheat in the cash market at the current market price, which may be higher or lower than the forward price. This sale of wheat in the cash market is known as forward cover.
In both examples, forward cover is used to fulfill the obligation of a forward contract by purchasing or selling the underlying asset in the cash market.