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A forward contract is similar to a futures contract, in the sense that both types of contracts cover the delivery and payment for a specific commodity at a specific future date at a specific price.
The difference is that a futures contract has fixed terms, such as delivery date and quantity, and it's traded on a regulated futures exchange.
A forward contract is traded over the counter and all details of the contract are negotiated between the counterparties, or partners to the agreement.
The price specified in the forward contract for foreign currency, government securities, or other commodities may be higher or lower than the actual market price at the time of delivery. The market price at delivery is known as the spot price.
But the participants have locked in a price early so they know what they will receive or pay for the product, eliminating market risk.
- Browse Related Terms: Cash market, Contango, Counterparty, Counterparty risk, Foreign exchange (FOREX), Forward contract, futures, options, Past Due Item, Spot market, Spot price