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Forwards
Forwards contract are customized contract between two entities to buy or sell an asset on a specified future date for a specified price.
Features of Forward
EXAMPLE:
LIMITATIONS:
Counter party risk.
Lack of centralizing of trading.
Price not being transparent.
Forwards contract are customized contract between two entities to buy or sell an asset on a specified future date for a specified price.
Features of Forward
- Contract between two parties.
- Price decided today.
- Quantity & Quality decided today.
- Settlement will take place in future.
- No Margins are generally payable by any of the parties.
- Customized Contract
- Traded in the over-the-counter market
EXAMPLE:
- An investor enters into a forwards contract to buy 100 Infosys shares at Rs. 2000 each for delivery 3 months hence .
- If the price of Infosys shares 3 months hence , is Rs. 2200 , the investor gains & if it falls below Rs 2000 , he loses.
LIMITATIONS:
Counter party risk.
Lack of centralizing of trading.
Price not being transparent.