Here are some key aspects of a forward contract:
Parties involved: The two parties involved in a forward contract are the buyer and seller. The buyer is the party who agrees to purchase the asset at a future date, and the seller is the party who agrees to deliver the asset at a future date.
Asset: The asset that is being traded in a forward contract can be any commodity, financial instrument, or currency. Some examples include oil, gold, stocks, bonds, and foreign currencies.
Price: The price of the asset is agreed upon at the time the contract is signed. This is known as the forward price. The forward price is usually determined by taking into account the current market price of the asset, interest rates, and the time until the delivery date.
Delivery date: The delivery date is the date on which the buyer receives the asset from the seller. It is agreed upon at the time the contract is signed.
Settlement: Settlement of a forward contract occurs on the delivery date. The seller delivers the asset to the buyer, and the buyer pays the agreed-upon price to the seller.
Risk: The primary risk associated with a forward contract is the risk of default by either the buyer or the seller. If one party fails to honor their obligations, the other party may incur losses. Additionally, changes in the market price of the asset can result in losses for one or both parties.
Overall, a forward contract is a useful tool for managing price risk associated with an asset. It allows buyers and sellers to lock in a price for a future transaction, which can be useful in managing uncertainty in the market. However, it is important to understand the risks associated with a forward contract and to have a clear understanding of the terms and conditions of the agreement.