WHAT IS 'Buyer's Call'

A buyer’s call is an agreement between a buyer and seller whereby a commodity is purchased at a specific price above a futures contract for an identical grade and quantity. Also known as a call sale, the agreement gives the buyer the option to fix the price of the commodity by either purchasing a futures contract from the seller or indicating to the seller the time at which the price of the transaction will be set. 

There are two types of options: calls and puts. A call option increases in value if the price of the underlying commodity rises. It gives an investor the right to buy the commodity at a predetermined price within a certain time frame. A put option functions similarly, but it increases in value if the price of the underlying commodity falls.

BREAKING DOWN 'Buyer's Call'

A buyer's call is used instead of buying the commodity on the spot market because of the possibility that its price will depreciate. The spot is a market for financial instruments such as commodities, which are traded immediately or on the spot.

A buyer’s call occurs when a buyer needs a commodity that the seller has in stock. However, the buyer does not need the commodity immediately; instead, both parties agree to delivery at a later date. Binding that agreement is the futures contract on the specific commodity that both the buyer and seller agree to. 

The transaction itself is done at a price above a futures contract. A buyer’s call satisfies the immediate requirement of a commodity by the buyer and the seller gets in exchange a futures contract that would recoup his inventory for the commodity at a later date. The commodity needs to match in both quantity and quality.

Example of a Buyer’s Call

A buyer that needs 10 barrels of sweet crude oil today could purchase them on the spot market for $50 per barrel. However, if that same buyer does not need the oil for another six months, a buyer’s call would allow the buyer to enter a contract with an oil company that has the oil.

By entering into the call, the buyer would either offer to buy a six-month future contract from the oil company in exchange for the barrels of oil, or offer to buy 10 barrels of oil at some point in the future at a fixed market price. In this scenario, the oil company would be able to make a profit from the buyer’s purchase while still obtaining their required amount of oil six months in the future.

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