Forward contract

ISDA Anatomy™ incorporating our exclusive ISDA in a Nutshell™ Go Premium Index: Click ᐅ to expand: ISDA Navigation 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 FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events Illegality • Tax Event • TEUM • CEUM • ATE • 5 Events of Default FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events Illegality • Tax Event • TEUM • CEUM • ATE • 5 Events of Default FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events Illegality • FM • Tax Event • TEUM • CEUM • ATE • Early Termination 6 Early Termination ET right on EOD • ET right on TE • Effect of Designation • Calculations 6 Early Termination ET right on EOD • ET right on TE • Effect of Designation • Calculations • Set-off 6 Early Termination ET right on EOD • ET right on TE • Effect of Designation • Calculations • Set-off 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 Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

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.