Forward is ... Specification and types of contracts

Forward is a contract, which is a kind of agreement between the two parties, which stipulates delivery of the underlying asset. The main points of the agreement are discussed even before the conclusion of the agreement. The implementation of the contract is carried out according to clearly defined criteria and within the agreed terms. The contract does not require expenditure from the counterparties, with the exception of commissions 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 a clearing mechanism, and the delivery still took place.

Specification of forward contracts

Forward is a contract, the purpose of which is to realize a real sale or purchase of a certain asset. The agreement allows you to insure the supplier or buyer against an unexpected change in the value of the underlying asset. Counterparties are always reinsured from unplanned developments. Conclusion of the agreement precludes the opportunity to take advantage of favorable conditions. Prior to the conclusion of the agreement, counterparties should analyze the information on the reputation of the partner, as well as clarify its solvency. This will avoid the situation when one of the parties will not be able to fulfill its obligations due to bankruptcy or bad faith.

Goals of partnership

Forward - this is a unique format of partnership, which is used to earn on the difference in the exchange rate of the underlying asset. A person who opens a short position, expects to reduce the value of the asset. The opposite side, betting on the growth of the asset, opens a long position. Forward refers 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 rules is the forward foreign exchange market. Forward is a transaction, at the conclusion of which both parties accept an acceptable asset value for them. This price is called the cost of delivery. It remains statistical throughout the duration of the agreement. There is also the concept of a forward price, which is the value of an asset for a certain period of time. Its second name, the price of delivery, mentioned above. It is established by a contract concluded at a certain point in time.

The legal side of the question

In accordance with the law, the forward is an arrangement, the result of which is the actual delivery of the goods. The object of agreements can be any valuable property that is available. The reference to the real existence of an asset should not in any way limit the seller's ability in the aspect of concluding a contract and selling the product, which will either be formalized or created in the near future. The contract is implemented after a clearly defined time interval. The calculation by agreement and the obligation to supply are realized not immediately, but after the expiration of the agreed period of time. Trade contracts are carried out within the OTC market. In order for an agreement to take place, there must be participants in the market who want to buy and sell at the same time and sell a certain volume of the asset.

Hedging of risks

Forward is a universal format for obtaining speculative profit, which allows for professional hedging of risks. The asset price under the forward contract will always differ from the value of the asset under the 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 the contract is entered into is determined on the basis of stock quotes for the goods. The price is a kind of result of a thorough analysis of the situation on the market. Participants in the transaction make a kind of forecast taking into account all the factors that may affect the change in quotations. We consider some prospects for the movement of the price schedule.

Differentiation of the fauards

Forward - this is a security that allows speculators to earn. In the process of market development, a certain division of contracts into two categories was formed:

• Deliveries.
• Estimated or non-deliverable.

The result of the delivery contracts is to deliver the goods and agree on it in advance. Mutual settlement is carried out by paying one counterparty to another 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 exclusively for the purpose of paying the losing side the difference in the price of the asset that has been formed at a certain point in time. The difference in the value of the underlying asset is called the variation margin, and it is calculated based on the actual price of the commodity on the exchange.