A forward contract is a flexible derivative contract in which two parties agree to buy or sell an asset at a predetermined price at a future date. Forward contracts can be customised to a particular product, quantity, and delivery date.
Assume you are a farmer who wants to sell wheat at the present pricing of Rs. 18, but you are aware that wheat prices are expected to fall in the coming months. In this scenario, you sign a contract with a grocery store to sell them a specific amount of wheat for Rs. 18 over the course of three months.
A derivative instrument is a forward contract. This is an agreement between two investing parties to buy or sell an underlying asset or security at a future date at a certain rate and in the predetermined amount.
A forward contract is an agreement between two parties to trade a predetermined quantity of an asset for a predetermined price at a future date.
Forward contracts have the following benefits: 1) They can be matched against the exposure period as well as the amount of money at stake. 2) Forwards are custom-made and can be created for any amount and length of time. 3) It provides a complete barrier. 4) Forwards are traded over-the-counter.
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