Can a forward contract be used for hedging?

A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging . A forward contract is a customizable derivative contract between two parties to buy or sell an asset at a specified price on a future date.

Why should you enter into a forward contract?

The essential idea of entering into a forward contract is to fix the exchange rate in advance and thereby avoid the exchange rate risk. Forward contract is used for hedging the foreign exchange risk for future settlement.

What are the features of a forward contract between two parties?

The following are features of any forward contract between two parties: A forward contract does not trade on any centralized exchange. It is also not regulated by a third-party authority. Forward contracts are bilateral hence are prone to counterparty risks.

What is a flexible forward contract?

These are also known as European contracts or Standard Forward Contracts. With flexible forwards, the parties can exchange the funds before the settlement date, often in parts, as long as the entire amount is settled by the due date.