Forward Contract

There are no sure things in global markets. Deals that looked good six months ago can quickly turn sour if unforeseen economic and political developments trigger fluctuations in exchange rates or commodity prices Over the years traders have developed tools to cope with these uncertainties. One of this tool is the forward agreements “A contract that commits one party to buy and other to sell a given quantity of an asset for fixed price on specified future date”. In Forward Contracts one of the parties assumes a long position and agrees to buy the underlying asset at a certain future date for a certain price. The specified price is called the delivery price. The contract terms like delivery price, quantity are mutually agreed upon by the parties to contract. No margins are generally payable by any of the parties to the other. Features of Forward Contract • It is negotiated contract between two parties i.e. Forward contract being a bilateral contracts, hence exposed to counterparty risk. • Each Contract is custom designed and hence unique in terms of contract size, expiration date, asset quality, asset type etc. • A contract has to be settled in delivery or cash on expiration date • In case one of two parties wishes to reverse a contract, he has to compulsorily go to the other party. The counter party being in a monopoly situation can command at the price he wants.