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Forward contract

The forward contract is an agreement between two parties to buy or sell an asset at a particular future date at a predetermined price. One party agrees to sell an asset (taking a short position), and the other party agrees to buy it (taking a long position).

Forward contracts are the most simple type of derivatives. They allow to book the future buying or selling price of a good and eliminate the price fluctuation risks.

Unlike futures contracts, forwards are non-standardized in terms of contract size and expiry. They are, usually, arranged between two parties in the over-the-counter markets.

A futures contract, therefore, is nothing else but a forward contract with standardised size and delivery date, which facilitates trading on the exchanges with multiple parties involved.

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