forward contract (redirected from Forward Contracts)
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Related to Forward Contracts: Futures contracts
, Options Contracts
, Forward Currency Contracts
An agreement to buy
at a certain date at a certain price
. That is, Investor A may make a contract with Farmer B in which A agrees to buy a certain number of bushels of B's corn at $15 per bushel. This contract must be honored whether the price
of corn goes to $1 or $100 per bushel. Forward contracts can help reduce volatility
in certain markets
, but they contain the risks
inherent to all speculative investing. These contracts may be sold on the secondary market
, but the person holding the contract at its end must take delivery of the underlying asset
. Forward contracts are identical to futures contracts
except that their provisions are not standardized. That is, forwards may be written with any provisions the parties desire. While this allows for greater flexibility, this makes the contracts less liquid
on the secondary market and prevents them from being traded
on an exchange
An agreement between two parties to the sale and purchase of a particular commodity at a specific future time. Although forward contracts are similar to futures, they are not easily transferred or canceled. Thus, they are not liquid.
A forward contract is similar to a futures contract in the sense that both types of contracts cover the delivery and payment for a specific commodity at a specific future date at a specific price.
The difference is that a futures contract has fixed terms, such as delivery date and quantity, and it's traded on a regulated futures exchange.
A forward contract is traded over the counter and all details of the contract are negotiated between the counterparties, or partners to the agreement.
The price specified in the forward contract for foreign currency, government securities, or other commodities may be higher or lower than the actual market price at the time of delivery, known as the spot price.
But the participants have locked in a price early specifically so they know what they will receive or pay for the product, eliminating market risk.