Forward Contract
A privately negotiated agreement to buy or sell an asset at a set price on a future date, not traded on an exchange.
How it is identified
Test: terms are bilaterally negotiated, the contract is not exchange-traded, and settlement occurs directly between the parties
Unit
qualitative
In depth
A forward is the ancestor of the futures contract and differs in three ways that matter: it is customised rather than standardised, it carries counterparty risk because no clearing corporation stands between the parties, and it is settled once at maturity rather than marked to market daily. Customisation is the advantage — an exporter can hedge an exact amount on an exact date, which a standardised contract cannot do. Counterparty risk is the cost, and it is why forwards are used mainly by banks and corporates with credit relationships. In India, currency forwards through banks are far larger in volume than exchange-traded currency futures.
Worked example
An exporter expecting USD 3,50,000 in 47 days books a forward at ₹83.40, fixing receipts at 3,50,000 x 83.40 = ₹2,91,90,000. A futures hedge would require rounding to standard lot sizes and a standard monthly expiry.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Forward Contract” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.