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Forward Contract

What does Forward Contract mean?

A contract between a buyer and a seller of an asset such as a commodity or financial instrument at a predetermined price on an agreed future date. Although forward contract are like futures contracts, these are not traded on stock exchanges and hence are private agreements.

Futures Knowledge Explains Forward Contract

Forward contract is a derivative instrument and used for hedging and speculation arising from change in prices. For example, a trader dealing in wheat may enter into a forward contract to sell a specified quantity of wheat at a specified price to a buyer today even though the production and harvesting of the same happens next year. This way, the seller ensures that there is a market for wheat and that he will be able to sell the same. The buyer may safeguard himself from fluctuations in price in the future. The contract can be settled either by physical delivery or for a cash price.

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