Forward Contract
A private, over-the-counter agreement to buy or sell an asset at a predetermined price on a specified future date.
A forward contract is a bilateral, privately negotiated agreement — unlike futures, it is not traded on an exchange and is not standardized. The two parties set every term: underlying, quantity, price, and settlement date.
Because there is no exchange clearinghouse, forwards carry counterparty credit risk: if the losing party defaults, the winner bears the loss. Settlement occurs at maturity; there is no daily variation margin.
Forwards are widely used in FX markets by corporates hedging currency receivables and payables.
Example
A US importer locks in EUR/USD at 1.0850 for €1 million due in 90 days via a EUR/USD forward. If the euro appreciates to 1.1200 at maturity, the importer still pays the contracted 1.0850 rate, saving $35,000.
Related Terms
Derivative
A financial contract whose value is derived from the price of an underlying asset such as a stock, index, commodity, or currency.
IntermediateFutures Contract
A standardized, exchange-traded agreement to buy or sell an asset at a fixed price on a set future date, settled daily via mark-to-market.
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