Definition of Forward contract

Forward contract is a customized agreement between two parties (buyer and seller) to buy or sell an underlying asset. The transaction takes place on a future date but at a price agreed today. The term ‘agreed today’ simply refers to the date on which two parties enter into the contract.

It should be noted here that like future contract, forward contract is also one of the important types of derivatives.

Unlike future contracts, forward contracts takes place over the counter. It means that there is not such a financial exchange where forward contracts can be traded. As opposed to future contract, these contracts are settled on a specific date agreed by the parties.


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