Forward contract: Difference between revisions
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{{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 and futures have similar economic effects, and in limited cases are [[exchange-for-swap|exchangeable]], but they not the same. | |||
====Economic features==== | |||
Economically the main points of a forward sale agreement are: | |||
Hedging Risk: Forward contracts are often used to hedge against the risk of price fluctuations in the market1. For example, a producer of a commodity might enter into a forward contract to sell their goods at a fixed price, protecting them from potential price drops1. | |||
Speculation: Some market participants use forward contracts for speculation, betting on the future price movements of an asset1. | |||
Absence of Upfront Funding: In some cases, the seller (such as a developer in a real estate project) benefits from an absence of upfront funding of the project2. | |||
Early Capital Call: On the other hand, the buyer may be required to call capital at an early stage without presenting rental revenues2. | |||
Remember, while forward contracts can provide stability and predictability, they also come with their own risks, including the risk of default | |||