FORWARD CONTRACT Meaning and
Definition
-
A forward contract is a financial agreement between two parties, in which they commit to buying or selling an asset at a specified price on a predetermined future date. This contractual arrangement is utilized as a risk management tool by businesses to hedge against potential price fluctuations and secure future positions. It is considered a type of derivative contract, as its value is derived from an underlying asset.
The key characteristics of a forward contract are its customization and absence of an exchange or standardized trading platform. The terms of the agreement, including the asset, price, quantity, and delivery date, can be tailored to the specific needs of the parties involved. The most common assets traded through forward contracts include commodities like oil, grains, or metals, as well as currencies.
Since forward contracts are private agreements, they are not traded on organized exchanges. Instead, they are typically entered into by parties directly or facilitated by specialized intermediaries. Due to the lack of exchange oversight, forward contracts carry a counterparty risk, as the buying and selling parties rely on each other to fulfill the contract's obligations in the future.
When entering into a forward contract, both parties are legally obligated to fulfill the agreement at the specified future date, regardless of the prevailing market prices. As a result, the success of a forward contract largely depends on accurate price forecasting and risk management strategies. Furthermore, forward contracts differ from futures contracts in that they are not standardized and are not typically traded on a secondary market, making their terms more flexible.
Common Misspellings for FORWARD CONTRACT
- dorward contract
- corward contract
- vorward contract
- gorward contract
- torward contract
- rorward contract
- firward contract
- fkrward contract
- flrward contract
- fprward contract
- f0rward contract
- f9rward contract
- foeward contract
- fodward contract
- fofward contract
- fotward contract
- fo5ward contract
- fo4ward contract
- forqard contract
- foraard contract
Etymology of FORWARD CONTRACT
The word "forward" in "forward contract" can be traced back to the Old English word "foreweard", which means "early" or "preceding". The term "forward" in this context refers to a financial contract or agreement made for the future delivery of goods or assets at a predetermined price. The word "contract" comes from the Latin word "contractus", which means "drawn together" or "bound". Therefore, the etymology of "forward contract" essentially refers to a binding agreement for future delivery.
Infographic
Add the infographic to your website:
