What is a forward and futures contract?

Forward and futures contracts involve the agreement between two parties to buy and sell an asset at a specified price by a certain date. A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter (OTC).

What is a forward contract and hedging?

When a forward contract is signed, one party agrees to sell (the supplier), and the other party consents to buy (the company) the underlying asset at a set price at a set future date. Hedging means using financial instruments such as derivative contracts to reduce future risk from increasing prices.

What are the underlying assets of a Forwards contract?

Similarly to futures contracts, the underlying assets of forwards can be different types of commodities like energy: oil, gasoline; metal: gold, silver, copper; agricultural products: wheat, sugar, coffee, cotton, grains; or livestock: cattle, lean hogs, etc.

What happens if a forward contract is not used?

If the forward contract is not used, the price of the textiles could increase, and the business may not have the funds to pay for the order when it arrives. A forward contract will fix the price that the customer pays for its future order on a specific date.