How can forward contracts be used to hedge against commodity price risk according to the chapter?

Forward contracts can be used to hedge against commodity price risk by allowing firms to lock in a selling price for a commodity they expect to sell in the future. This ensures that the firm can predict its costs and profits, reducing the uncertainty associated with fluctuating commodity prices.

By negotiating a forward contract, a firm can establish a fixed price for a commodity that it plans to sell at a future date. This strategy helps mitigate the risk of price fluctuations, as the firm can secure its profit margins regardless of market changes. For instance, if a firm anticipates needing a specific quantity of a commodity, it can use a forward contract to ensure that it will purchase that commodity at a predetermined price, thus stabilizing its financial outcomes.