Forward contract

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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 and futures have similar economic effects, and in limited cases are 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