Suppose that in six months we will need 500 ounces of gold, and that the current (time \(t=0\) ) forward price for delivery in 0.5 years (six months) is

\[F\left(\begin{array}{lll}0 & 0 & 5\end{array}\right)=1250 \$ \text { ounce }\]

Then, we may enter into a long position for 500 ounces to lock that price. As a practical remark, we shall see that real-life contracts may be given for standardized sizes, such as, e.g., 100 ounces. If the contract is settled by physical delivery, we shall buy gold at 1250 dollars per ounce, no matter what. The corresponding (negative) cash flow is

\[1250 \$ \text { ounce } 500 \text { ounces }=\$ 625000\]

If the contract is settled in cash, and the spot price at maturity turns out to be \(1150 \$\) ounce, our cash flow will be

\[\left[\begin{array}{lll}(1150 & 1250) & 1150\end{array}\right] \$ \text { ounce } \quad 500 \text { ounces }=\$ 625000\]

the same as before. Note that, in this case, we buy at a cheaper spot price, but this is compensated by a loss on the long forward position.