Definition
Forwards are over-the-counter (OTC) contracts obligating both parties to transact at the agreed forward price on the settlement date. Unlike futures, forwards are not standardized or exchange-traded, making them flexible but exposing parties to counterparty risk. They are widely used in currency and commodity hedging by corporations.
functions Formula
Forward Price = Spot × (1 + r)^t − PV(dividends)
lightbulb Example
A company needs €1M in 6 months. Current EUR/USD is 1.10, 6-month forward rate is 1.1050. The company locks in buying €1M at $1,105,000 regardless of spot rate movement.
verified_user Key Points
- OTC contract—customizable but counterparty risk
- Obligation for both buyer and seller
- No daily settlement (unlike futures)
- Forward price reflects cost of carry