Forward contract

A forward contract is a type of contract betweentwo parties on the supply of the subject of the contract (the basic asset) at a certain time in the future, at a predetermined price. Such a document is concluded for the purchase (sale) of a certain amount of a tangible or financial asset.

Each party imposes on itself the performancestipulated in writing obligations: one - to make a delivery, the other - to accept it. Initially, the price of the transaction is agreed upon, which suits all parties. It is called the delivery price and is unchanged throughout the term of the contract.

The person assuming the obligation of deliveryassets, opens a short position (that is, sells a contract). The second side of the transaction, acquiring the asset, in turn, opens a long position (that is, buys a contract). Registration of the transaction does not require counterparties to pay any expenses, except for commissions when concluding it with the help of intermediaries.

A forward contract is signed with a view tomaking a real purchase (sale) of various kinds of assets and insurance of the buyer (as well as the supplier) against a possible price change in an unfavorable party for any party. Such a contract requires mandatory implementation. In a number of cases, however, there are risks, for example, with the bankruptcy of one of the participants. Therefore, in order to secure itself, before entering into this kind of transaction it is necessary to find out the reputation and make sure of the future counterparty's solvency.

Sometimes a forward contract is concluded for the purpose of making a profit at the expense of the difference in the value of the assets. This is done in case of waiting for growth or lower prices of the basic goods.

Such a contract is individual, therefore, as a rule, it is not used in the secondary market. An exception is the forward foreign exchange market.

As a result of the conclusion of the contractreal delivery of goods is considered. The subject of the forward transaction is the goods that are available. Such a contract is strictly adhered to within the period established by the contract.

Forward is an excellent insurancearrived. The concluded transaction fixes the conditions existing at the time of signing the documents: price, deadline, quantity of goods, etc. Such insurance of the parties from changing the initial conditions of the transaction is called a hedge.

As a rule, the cost of goods for such transactions is notIt coincides with the prices for cash transactions. It is the average exchange value of the price of a certain commodity. The forward value is determined by the participants of the transaction, based on the data of the assessment of all the factors and prospects that affect the state of the market.

Features of the financial market led to the fact thatforward contract began to be divided into settlement transactions (non-deliveries) and delivery transactions. The latter assume the delivery of supplies and mutual settlement by transferring the difference formed in the price of the goods, or the amount previously agreed upon under the contract.

Under the forward contract, payment is expecteddividends on shares or stipulate their non-payment. When they are paid during the term of the transaction, its price is adjusted by the amount of dividends listed, proceeding from the fact that subsequently (after the acquisition of the contract), the investor will cease to receive them.

Thus, the forward is a fixed-term contract,a solid transaction that is binding for execution. This contract can not be called standard. Since the secondary market is very narrow, it is very difficult to find a third party whose interests fully correspond to the terms of the contract. Therefore, the transaction is within the needs of only two parties. The party can only liquidate a position with the consent of the counterparty.