Forward is a contract, which is a kind of agreement between the 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 on time. The contract does not require expenses from counterparties, with the exception of fees related to the execution of the contract with the involvement of intermediaries. The forward can be called a futures contract, which until the expiration was not closed by the clearing mechanism, and the delivery nevertheless took place.
Forward contract specifications
Forward is a contract, the purpose of which is the realization of a real sale or purchase of a specific asset. The agreement allows you to insure the supplier or buyer from unforeseen changes in the value of the underlying asset. Counterparties are always safe from unplanned developments. The conclusion of the agreement excludes the opportunity to take advantage of favorable conditions. Prior to concluding an agreement, counterparties should analyze the information on the partner’s reputation, as well as clarify their solvency. This will avoid a situation where one of the parties will not be able to fulfill its obligations due to bankruptcy or dishonesty.
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 opening a short position expects a decrease in the value of the 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 foreign exchange market. Forward is a transaction at the conclusion of which both parties accept an asset value acceptable to them. This price is called the delivery cost. It remains statistical throughout the duration of the agreement. There is also the notion of a forward price, which is the value of an asset over a period of time. Its second name, the delivery price mentioned above. It is established by a contract concluded at a certain point in time.
The legal side of the issue
In accordance with the law, a forward is an arrangement, the result of which is a real delivery of goods. The object of the agreement may be any valuable property that is available. A reference to the actual existence of an asset should not limit the seller’s ability in terms of concluding an agreement and selling a product that will either be executed 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 immediately realized, but after the expiration of the agreed period of time. Contracts are traded in the OTC market. In order for an agreement to take place, there must be participants on the market who want to simultaneously buy and sell a certain amount of the asset.
Risk hedging
Forward is a universal format for obtaining speculative profit, which allows professional hedging of risks. The price of an asset under a forward contract will always differ from the value of an asset under a cash contract. The final monetary equivalent of the goods can be determined both in the process of concluding the contract, and already at the stage of its implementation. The average value of an asset at the time of conclusion of the contract is determined based on stock quotes for the goods. Price is a peculiar 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 considered.
Differentiation of the Howards
Forward is a security that allows speculators to earn money. In the process of market development, a certain division of contracts into two categories has formed:
- Deliverable.
- Estimated or non-deliverable.
The result of delivery 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 paying the loser the difference in the price of the asset, which was formed at 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 goods on the exchange.