Forward
Forward is a financial term that refers to a contract between two parties to buy or sell an asset at a predetermined price on a future date. This type of agreement is often used to hedge against the risk of price fluctuations in the underlying asset. The forward contract is not traded on an exchange, but is instead negotiated directly between the two parties involved. The contract is legally binding and can be used to protect against losses due to price changes in the underlying asset.
History of the Term
The concept of forward contracts has been around for centuries, with the earliest known example dating back to the 17th century in Japan. In the 19th century, forward contracts were used by farmers to hedge against the risk of price fluctuations in their crops. By the 20th century, forward contracts had become a popular tool for hedging against price risk in commodities and currencies.
In the modern era, forward contracts are used by a variety of investors, including corporations, banks, and hedge funds. They are also used by governments to manage their foreign exchange reserves. Forward contracts are an important tool for managing risk in the financial markets.
Comparison Table
| Forward Contract | Futures Contract |
|---|---|
| Not traded on an exchange | Traded on an exchange |
| Negotiated directly between two parties | Traded between multiple parties |
| Price is predetermined | Price is determined by the market |
| Legally binding | Not legally binding |
Summary
Forward is a financial term that refers to a contract between two parties to buy or sell an asset at a predetermined price on a future date. This type of agreement is often used to hedge against the risk of price fluctuations in the underlying asset. The forward contract is not traded on an exchange, but is instead negotiated directly between the two parties involved. For more information about forward contracts, visit Investopedia, The Balance, or Investing.com.
See Also
- Futures Contract
- Options Contract
- Swap Contract
- Hedging
- Speculation
- Arbitrage
- Derivatives
- Commodities
- Currency
- Risk Management
