FORWARD CONTRACT

sunandaC

New member
FORWARD CONTRACT

A deal for the purchase or sale of a commodity, security or other asset can be in the spot of forward markets. A spot or cash market is most commonly used for trading. In addition to cash purchase, another way to acquire or sell assets is by entering into a forward contract. In a forward contract, the buyer agrees to pay cash at a later date when the seller delivers the goods.


Eg. If a car is booked with the dealer and the delivery matures, the car is delivered after its price has been paid.

Typically, in a forward contract, the price at which the underlying commodity or assets will be traded is decided at the time of entering into the contract.


The essential idea of entering into a forward contract is to peg the price and thereby avoid the price risk. Thus, by entering into a forward contract, one is assured of the price at which one can buy / sell goods or other assets.


Forward contracts have been in existence since quiet some time. The organize commodities exchanges, on which forward contracts are traded, probably started in Japan in the early 18th century, while establishment of the Chicago Board of Trade (CBOT) in 1848 led to the start of a formal commodities exchange in the USA.

A forward contract is evidently a good means of avoiding price risk, but it entails an element of risk in that, a party to the contract may not honour its part of the obligation.


Thus, each party faces the risk of default. There is another problem, once a position of buy or sell is taken in a forward contract an investor cannot retreat except through mutual consent with the other party or by entering into an identical contract and taking a position that is reverse of the earlier position. The alternatives are by no means very easy.
 

rosemarry2

MP Guru
FORWARD CONTRACT

A deal for the purchase or sale of a commodity, security or other asset can be in the spot of forward markets. A spot or cash market is most commonly used for trading. In addition to cash purchase, another way to acquire or sell assets is by entering into a forward contract. In a forward contract, the buyer agrees to pay cash at a later date when the seller delivers the goods.


Eg. If a car is booked with the dealer and the delivery matures, the car is delivered after its price has been paid.

Typically, in a forward contract, the price at which the underlying commodity or assets will be traded is decided at the time of entering into the contract.


The essential idea of entering into a forward contract is to peg the price and thereby avoid the price risk. Thus, by entering into a forward contract, one is assured of the price at which one can buy / sell goods or other assets.


Forward contracts have been in existence since quiet some time. The organize commodities exchanges, on which forward contracts are traded, probably started in Japan in the early 18th century, while establishment of the Chicago Board of Trade (CBOT) in 1848 led to the start of a formal commodities exchange in the USA.

A forward contract is evidently a good means of avoiding price risk, but it entails an element of risk in that, a party to the contract may not honour its part of the obligation.


Thus, each party faces the risk of default. There is another problem, once a position of buy or sell is taken in a forward contract an investor cannot retreat except through mutual consent with the other party or by entering into an identical contract and taking a position that is reverse of the earlier position. The alternatives are by no means very easy.
Hello there,

Please check attachment for Study on Forward Contracts and Forward Rates, so please download and check it.
 

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