To-Arrive Contract

A to-arrive contract is the first known futures-type contract that was developed in the middle of the nineteenth century at the Chicago Board of Trade (CBOT). The CBOT was established to bring farmers and merchants together and to standardize the quantities and qualities of the traded grains. These standardized contracts are called to-arrive contracts.

It allows the farmer to sell the grain for a fixed price, the so-called futures price, and to deliver the grain to a specified futures date. For example, a wheat farmer expects to have 100,000 bushels of wheat to sell in 4 months. The price of wheat is volatile so there is a price risk. To hedge this risk the farmer can agree to deliver the bushels of wheat in 4 months at a price that is set today.

The definition "to-arrive" is referred to the delivery of the traded commodity. In the nineteenth century and earlier, a lot of goods were brought by ship. h e price, quantity, and quality of the commodity were fixed before delivery. The main part of trading, that is, delivery and payment, took place when the ship arrived in the harbor. This type of contract is still used today, but not as much as it was in the past.

To-Arrive Contract