Forward Contracts

Forward contracts are similar to futures contracts in that they are agreements to buy and sell an asset at a certain time in the future for a certain price. However, unlike futures contracts, they are not traded on an exchange. They are private agreements between two financial institutions or between a financial institution and one of its corporate clients.

 One of the parties to a forward contract assumes a long position and agrees to buy assets at a certain specified date for a certain price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Forward contracts do not have to conform to the standards of a particular exchange. The delivery date in the contract can be any date mutually convenient to the two parties. Usually, in forward contracts, a single delivery date is specified, whereas in futures contract, there is a range of possible delivery dates.

 Forward contracts are not marked to market daily like futures contracts. The two parties contract to settle up on the specified delivery date. Whereas most futures contracts are closed out prior to delivery, most forward contracts do lead to delivery of the physical asset or to final settlement in cash

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