A forward contract is an agreement between two parties to buy or sell a specified asset at a set price at a predetermined future date.
They are over-the-counter, which means that they are concluded directly between the parties without the involvement of an exchange.
Unlike futures, they are not standardized and can be tailored to the specific needs of the parties.
This makes them more flexible in terms of transaction terms, but less liquid as they are difficult to transfer or sell to third parties.
The biggest concern is the default of one of the parties.
However, they also provide important benefits such as protection against unfavorable price movements, which is especially important for companies and investors engaged in long-term planning.
Currency options are often used by companies trading internationally to hedge currency risks.
Commodity contracts are concluded for the delivery of various commodities – oil, metals, grain, etc. They help producers and consumers of goods to protect themselves from price fluctuations.
Interest rate contracts allow to fix the interest rate for future payments on loans or deposits.
This is important for companies that want to protect themselves against future changes in interest rates.
The forward market is an important tool for risk management and long-term planning in various industries.
They allow participants to fix prices with protection against market fluctuations.
Given the level of risks and constraints, they play a key role in the global financial system, facilitating stable and predictable operations for businesses and investors.