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To understand a forward contract, it is helpful to first consider the process of buying or

selling stock. Such a transaction entails at least three separate steps: (1) the buyer and seller
agree to transact and set the price to be paid, (2) cash is transferred from the buyer to the
seller, and () shares are transferred from the seller to the buyer. Typically, steps 2 and
occur shortly after the buyer and seller agree to transact.1 !owe"er, as a logical matter, a
price could be set today and the transfer of shares and cash could then occur at a specified
date in the future.
This is in fact the definition of a : #t sets today the terms at which
you buy or sell an asset or commodity at a specific time in the future. $ forward contract
does the following:
Specifies the %uantity and e&act type of the asset or commodity the seller must deli"er.
Specifies deli"ery logistics, such as time, date, and place.
Specifies the price the buyer will pay at the time of deli"ery.
'bligates the seller to sell and the buyer to buy, sub(ect to the abo"e specifications.