Forward contract: Difference between revisions

From The Jolly Contrarian
Jump to navigation Jump to search
Tag: Redirect target changed
No edit summary
 
(3 intermediate revisions by the same user not shown)
Line 1: Line 1:
#redirect[[‎Forward Transactions - Equity Derivatives Provision]]
{{a|isda|}}{{dpn|/ˈfɔːwəd ˈkɒntrækt/ (also “[[forward sale]]”, “[[forward purchase]]” or just “[[forward]]”|n}}A over-the counter transaction under which one fellow agrees ''now'' to sell an [[asset]] to another at a pre-agreed price at some time ''in the future''. It is different from a [[Futures|future]], which is a standardised, [[exchange-traded]]  contract for the delivery of a certain asset at a pre-set date in the future.
 
Forwards have two main applications:
====Hedging====
As a way of locking in today a price for an asset you will only need in the future.  It is a way of buying an asset without hacing to funds full purchase price before the point where you actually need the asset. You settle the payment and delivery at the time the contract matures.
====Financing====
Often used in [[financing]] arrangements such as [[repurchase agreement]]s, which comprise simultaneously executed spot sale and forward purchase — so I transfer title to this thing, against agreeing to take it back from you at an agreed price at a stated time in the future. In this case the “lender” avoids taking exposure to the market value of the asset, but is able to have and hold it as collateral  — together with margin — against the “borrower”’s ultimate repayment obligation.
===“Forwards” versus “futures”===
Forward contracts are private, bilateral, [[over-the-counter]] contracts that may be customised to the parties’ hearts’ content. They can thus be contrasted with ''[[Futures|futures]]'' contracts, which are [[exchange-traded]], [[Central counterparty clearing house|centrally cleared]], standardised contract referencing the forward price of a commoditised asset, where there is no opportunity for customisation.
===Popular types of forward contract===
*{{eqderivprov|Forward Transaction}} under the {{eqdefs}}
*{{euaprov|Forward Transaction}} under the {{euadefs}}
{{sa}}
*Why [[Then I woke up and it was all a dream]] is not a great way of resolving settlement disruptions in a [[forward contract]]

Latest revision as of 12:32, 7 November 2023

ISDA Anatomy™
Index: Click to expand:Navigation
See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.
The Varieties of ISDA Experience
Subject 2002 (wikitext) 1992 (wikitext) 1987 (wikitext)
Preamble Pre Pre Pre
Interpretation 1 1 1
Obligns/Payment 2 2 2
Representations 3 3 3
Agreements 4 4 4
EODs & Term Events 5 Events of Default: FTPDBreachCSDMisrepDUSTCross DefaultBankruptcyMWA Termination Events: IllegalityFMTax EventTEUMCEUMATE 5 Events of Default: FTPDBreachCSDMisrepDUSTCross DefaultBankruptcyMWA Termination Events: IllegalityTax EventTEUMCEUMATE 5 Events of Default: FTPDBreachCSDMisrepDUSSCross DefaultBankruptcyMWA Termination Events: IllegalityTax EventTEUMCEUM
Early Termination 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculations; Payment DatePayments on ETSet-off 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculationsPayments on ETSet-off 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculationsPayments on ET
Transfer 7 7 7
Contractual Currency 8 8 8
Miscellaneous 9 9 9
Offices; Multibranch Parties 10 10 10
Expenses 11 11 11
Notices 12 12 12
Governing Law 13 13 13
Definitions 14 14 14
Schedule Schedule Schedule Schedule
Termination Provisions Part 1 Part 1 Part 1
Tax Representations Part 2 Part 2 Part 2
Documents for Delivery Part 3 Part 3 Part 3
Miscellaneous Part 4 Part 4 Part 4
Other Provisions Part 5 Part 5 Part 5
Tell me more
Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Forward contract
/ˈfɔːwəd ˈkɒntrækt/ (also “forward sale”, “forward purchase” or just “forward” (n.)
A over-the counter transaction under which one fellow agrees now to sell an asset to another at a pre-agreed price at some time in the future. It is different from a future, which is a standardised, exchange-traded contract for the delivery of a certain asset at a pre-set date in the future.

Forwards have two main applications:

Hedging

As a way of locking in today a price for an asset you will only need in the future. It is a way of buying an asset without hacing to funds full purchase price before the point where you actually need the asset. You settle the payment and delivery at the time the contract matures.

Financing

Often used in financing arrangements such as repurchase agreements, which comprise simultaneously executed spot sale and forward purchase — so I transfer title to this thing, against agreeing to take it back from you at an agreed price at a stated time in the future. In this case the “lender” avoids taking exposure to the market value of the asset, but is able to have and hold it as collateral — together with margin — against the “borrower”’s ultimate repayment obligation.

“Forwards” versus “futures”

Forward contracts are private, bilateral, over-the-counter contracts that may be customised to the parties’ hearts’ content. They can thus be contrasted with futures contracts, which are exchange-traded, centrally cleared, standardised contract referencing the forward price of a commoditised asset, where there is no opportunity for customisation.

Popular types of forward contract

See also