Forward contracts are the transactions that take place between two parties, in which one party agrees to sell/buy goods or services to/from other party on a future specified date, at the price currently trading. This is called as forward price and is predetermined, which is not subjected to change at the time of delivery. The period of contract may vary from 1 month to 24 months. The buying party is assumed to be long position and the selling part is assumed to be in short position.
Forward contract is in total contrast with the spot contract, which generates immediate liquidity. In a forward contract, the party which intends to buy can pay 10% of the actual price to guarantee the contract. The rest of the amount can be paid while acquiring the goods. These contracts can take place between foreign countries who try to export or import goods from each other.
Participants opt for these forward contracts, as it allows themselves to be protected from possible losses due to fluctuations in exchange of rates. This contract helps in taking advantage of the value fluctuations in the foreign exchange currency. A forward contract is used to hedge risk by speculators, to provide profit advantage for the participants.
A variation of forward contract is a time-option forward contract or widow contract, which allows the delivery of the goods before the prescribed date. Forward contracts are the instruments of foreign exchange market associated with high risks, but with right trading psychology can help us earn huge profits.
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