Buyer's Call

Buyer's Call

An agreement between a buyer and seller whereby a commodity purchase occurs at a specific price above a futures contract for an identical grade and quantity.

Also known as a call sale, this agreement gives the buyer the option to fix the price of the commodity by either purchasing a future from the seller or indicating to the seller a time in which the price of the transaction will be set. A buyer's call is used instead of buying the commodity on the spot market because of the possibility that its price will depreciate.

Notes:

Suppose, for example, I was in need of ten barrels of sweet crude today. I could purchase these barrels on the spot market for $50/barrel or enter into a buyer's call with an oil company that presently has the ten barrels but doesn't require them for another six months. By entering into the call, I would either offer to buy a six-month future contract for the oil company in exchange for the barrels of oil or offer to buy ten barrels of oil some point in the future at a fixed market price. The oil company is able to make a profit from my purchase while still obtaining their required amount of oil six months in the future. And I benefit from obtaining the oil today

See also: Basis, Basis Grade, Basis Quote, Buyer's Market, Differential