A forward is an agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed today. It is a derivative contract traded OTC. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.
The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party.
Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument, which is time-sensitive.
A closely related contract is a futures contract; yet, they differ in certain respects. Forward contracts are very similar to futures contracts, except that they are not marked to market, exchange traded, or defined on standardized assets. Moreover, forwards typically have no interim partial settlements or "true-ups" in margin requirements like futures - such that the parties do not exchange additional property securing the party at gain, and the entire unrealized gain or loss builds up while the contract is open. A forward contract arrangement might call for the loss party to pledge collateral or additional collateral to better secure the party at gain.
Editor: Chiara OLDANI
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