What is a forward contract?Back

Before starting about forward contract you should about derivative market because forward contract is type of derivative market.

Derivative market is a contract between two or more parties based upon the asset or assets. The value of derivative is determined by fluctuations in the underlying asset. Derivatives market are speculative investments or to reduce the risk in financial market. Derivative markets have been an effective solution to hedge the risks in the financial world.

The types of derivative contracts are:

Future
Forward
Options
Swap.

A forward contract is a type of derivative market. In forward contract, two parties agreed privately on a non-standardized to buy or sell an asset at a specified future time at a price agreed upon today.

It is very similar to future contracts, but the difference is it not exchange-traded, or defined on standardized assets.

Forward contracts are mainly used by hedgers, who want to eliminate the volatility of an asset's price, and delivery of the asset or cash settlement will usually take place. Forward contracts are mostly OTC (Over the counter) products and it can customized. Traders can take delivery settled as well as cash settled. The plus point is no margin required and no need to pay Mark to Market for Forward contracts.

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