FORWARD CONTRACT

Meaning

A forward contract is a customized

contract between two parties to buy or
sell an asset at a specified price on a
future date. A forward contract can be
used for hedging or speculation,
although its non-standardized nature
makes it particularly apt for hedging.
Forward Price and Forward Value
At a date where (T) is equal to zero, the value of the
forward contract is also zero. This creates two different but
important values for the forward contract: forward price
and forward value.

Forward price: refers to the pre-determined delivery price

for an underlying commodity or fixed asset decided by the
buyer and seller of the forward contract . This figure is
fixed for a period between the initial signing and the
delivery date.

The Forward value: value of forward contract at a

particular point of time refers to the profit/loss that would
be earned/incurred by the parties in the long and short
position. The value of a forward contract at time zero
Different Types of Forward Contract
There are four major types of forward
contract:

• Closed Outright Forward

• Flexible Forward

• Non-Deliverable Forward
Risks with Forward Contracts
1.The market for forward contracts is huge since many of the
world’s biggest corporations use it to hedge currency and interest
rate risks. However, since the details of forward contracts are
restricted to the buyer and seller – and are not known to the
general public – the size of this market is difficult to estimate.

2. In this case, the financial institution that originated the

forward contract is exposed to a greater degree of risk in
the event of default or non-settlement by the client than if the
contract were marked-to-market regularly.

3. Another risk that arises from the non-standard nature of

forward contracts is that they are only settled on the settlement
date and are not marked-to-market like futures contract.