What are Forward contracts?
A forward contract is a customized contract between two parties, where settlement takes place on a specific date in future at a price agreed today. The main features of forward contracts are: a. They are bilateral contracts and hence exposed to counter-party risk. b. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. f c. The contract price is generally not available in public domain. d. The contract has to be settled by delivery of the asset on expiration date. e. In case, the party wishes to reverse the contract, it has to compulsorily go to the same counter party, which being in a monopoly situation can command the price it wants.
A forward contract is an agreement to buy or sell an asset at a certain future time for a certain price. It is traded over the counter market- usually between two financial institutions or between a financial institution and its clients. They are commonly used to hedge foreign currency risk. (Source: Options, Futures and Other Derivatives by John C.
