Futures and Options (3)

Forward Contract

When an agreement to buy or sell an asset at an agreed price and specified date is privately made between two parties, it is termed as a forward contract.

For example, a crude palm oil refiner requires 1,000 tonnes of crude palm oil in six months time.

He finds a palm oil producer who agrees to sell him the 1,000 tonnes at a specified date and price, six months down the road.

Such an agreement between the two parties is a forward contract.

Forward contracts are therefore not standardised,meaning that as long as the price and date set is agreeable between the two parties, they can create their own forward contract on any commodity.

Such a form of privately arranged trading is done over-the-counter (OTC) as opposed to buying and selling futures contracts at the exchanges.