Forward is Specification and types of contracts

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Forward is a contract, which is a kind of agreement between two parties, which stipulates the delivery of the underlying asset. The main points of the agreement are discussed even before the conclusion of the contract. The implementation of the contract is carried out according to clearly established criteria and within the agreed time frame. The contract does not require expenses from counterparties, with the exception of commissions related to the execution of the contract when engaging intermediaries. A forward can be called a futures contract, which was not closed by the clearing mechanism until the moment of expiration, and the delivery nevertheless took place.

Forward specification

Forward is a contract, the purpose of which is the realization of a real sale or purchase of a certain asset. The agreement allows you to insure the supplier or the buyer against unforeseen changes in the value of the underlying asset. Counterparties are always reinsured against unplanned developments. The conclusion of an agreement excludes the possibility of taking advantage of a favorable market situation. Before concluding an agreement, counterparties must analyze information on the partner's reputation, andalso to clarify its ability to pay. This will avoid a situation where one of the parties is unable to fulfill its obligations due to bankruptcy or bad faith.

Partnership Goals

Forward is a unique partnership format that is used to earn on the difference in the rates of the underlying asset. A person who opens a short position expects a decrease in the value of an asset. The opposite side, betting on the growth of the asset, opens a long position. The forward belongs to the category of individual contracts, which determines the low liquidity of the secondary market and its insufficient degree of development. A significant exception to the rule is the forward currency market. A forward is a transaction in which both parties accept an acceptable asset value for them. This price is called the delivery cost. It remains statistical throughout the duration of the agreement. There is also the concept of a forward price, which is the value of an asset over a certain period of time. Its second name is the delivery price mentioned above. It is established by a contract concluded at a certain point in time.

The right side of the issue

In accordance with the law, a forward is an agreement, the result of which is the actual delivery of goods. The object of the agreements can be any valuable property that is available. A reference to the real existence of an asset should notlimit the ability of the seller in terms of concluding an agreement and selling goods that will either be issued or created in the near future. The implementation of the contract is carried out after a clearly defined period of time. Settlement by agreement and delivery obligations are not realized immediately, but after the expiration of the agreed period of time. Contracts are traded within the OTC market. For an agreement to take place, there must be participants in the market who want to both buy and sell a certain amount of an asset at the same time.

Risk hedging

Forward is a universal format for obtaining speculative profit, which allows for professional hedging of risks. The price of an asset under a forward contract will always differ from the price of an asset under a cash contract. The final cash equivalent of the goods can be determined both in the process of concluding a contract, and already at the stage of its implementation. The average value of the asset at the time of the conclusion of the contract is determined based on exchange quotations for the goods. The price is a kind of result of a thorough analysis of the market situation. The participants in the transaction make a kind of forecast, taking into account all the factors that may affect the change in quotes. Some prospects for the movement of the price chart are being considered.

Forward differentiation

Forward is a security that allows speculators to earn. In the process of market development, a certain division of contracts into two categories has formed:

• Delivery.
• Settlement or non-deliverable.

The result of supply contracts is the delivery of goods and this is agreed in advance. Mutual settlement is carried out by paying one counterparty to another the difference in the price of the goods or a predetermined amount. It all depends on the terms of the contract. Settlement agreements do not provide for the final delivery of goods. The contract is concluded solely for the purpose of payment by the losing party of the difference in the price of the asset that has formed over a certain point in time. The difference in the value of the underlying asset is usually called the variation margin, and it is calculated based on the actual price of the commodity on the exchange.