A forward contract is similar to a futures contract in the sense that both types of contracts cover the delivery and payment for a specific commodity at a specific future date at a specific price. The difference is that a futures contract has fixed terms, such as delivery date and quantity, and it's traded on a regulated futures exchange. A forward contract is traded over the counter and all details of the contract are negotiated between the counterparties, or partners to the agreement. The price specified in the forward contract for foreign currency, government securities, or other commodities may be higher or lower than the actual market price at the time of delivery, known as the spot price. But the participants have locked in a price early specifically so they know what they will receive or pay for the product, eliminating market risk. Related to forward contract: hedging , Option contract , Future Contract.
Forward Contract vs. Futures Contract
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Did you know forward locked rates are typically always better than immediate starts? In the image, you will see regardless to the fluctuations in the market The rates are lower the further the contract is out!
Why inflict an unnecessary defined term on the reader? When a contract is dated by having the parties date their signatures rather than by including a date in the introductory clause something I discuss in this blog post , one sees Effective Date used to refer to the date when all the parties have signed:. But as I note in this blog post , I find it simpler to arrange matters so that in this context, too, I can use the date of this agreement. Sometimes the parties use Effective Date to refer to a future date when some or other arrangement kicks in.