Forward contract

A forward contract is a type of contract between the two parties for the delivery of the subject of the contract (the underlying asset) at a certain time in the future, at a predetermined price. Such a document consists in the purchase (sale) of a certain amount of a tangible or financial asset.

Each of the parties imposes on itself the fulfillment of the obligations stipulated in writing: one - to make a delivery, the other - to accept it. Initially, the price of execution of the transaction is agreed, suiting all parties. It is called the delivery price and is unchanged throughout the term of the contract.

A person assuming the obligation to supply assets opens a short position (that is, sells a contract). The second side of the transaction, acquiring the asset, in turn, opens a long position (that is, buys a contract). Registration of the transaction does not require contractors to pay any expenses, except for commissions when concluding it with the help of intermediaries.

A forward contract is signed for the purpose of making a real purchase (sale) of various kinds of assets and insurance of the buyer (as well as the supplier) against a possible price change in an unfavorable party for any party. Such a contract requires mandatory implementation. In a number of cases, however, there are risks, for example, with the bankruptcy of one of the participants. Therefore, in order to protect themselves, before entering into this kind of transaction it is necessary to find out the reputation and make sure of the future counterparty's solvency.

Sometimes a forward contract is concluded for the purpose of making a profit at the expense of the difference in the exchange value of assets. This is done in case of expectation of growth or reduction of prices of the basic goods.

Such a contract is individual, therefore, as a rule, it is not used in the secondary market. An exception is the forward foreign exchange market.

As a result of the conclusion of the contract , the actual delivery of the goods is considered. The subject of the forward transaction is the goods that are available. Such a contract is strictly adhered to during the term established by the contract.

Forward is an excellent means of profit insurance. The concluded transaction fixes the conditions existing at the time of signing the documents: price, deadline, quantity of goods, etc. Such insurance of the parties from changing the original terms of the transaction is called a hedge.

As a rule, the cost of goods for such transactions does not coincide with the prices for cash transactions. It is the average exchange value of the price of a certain commodity. The forward value is determined by the participants of the transaction, based on the assessment of all factors and prospects that affect the market.

Features of the financial market led to the fact that the forward contract was divided into settlement transactions (non-deliveries) and delivery transactions. The latter presuppose the delivery of supplies and mutual settlement by transferring the difference formed in the price of the goods, or the amount previously agreed upon under the contract.

According to the forward contract, it is planned to pay dividends on shares or stipulate their non-payment. If they are paid during the term of the transaction, its price is adjusted by the amount of dividends listed, proceeding from the fact that subsequently (after the acquisition of the contract), the investor will cease to receive them.

Thus, the forward is a fixed-term contract, a firm transaction that is mandatory for execution. This contract can not be called standard. Since the secondary market is very narrow, it is very difficult to find a third person whose interests fully correspond to the terms of the contract. Therefore, the transaction is within the needs of only two parties. The party can only liquidate the position with the consent of the counterparty.