In our routine life, we have to purchase many things some on cash and others on credit. Another shape of trade is observed through a forward contract. Using this agreement, we can make a contract about any commodity such as gold, grain, fruits, pulses and many other commodities. This kind of agreement is much helpful in managing the purchase of goods in the future times, making them economical for the purchaser keeping the sale price locked.
What is a Forward Contract?
The forward contract is a legal agreement between a seller and a buyer that allows the buyer to purchase an item at a fixed price in future time. When this agreement is signed, it bounds the seller to sell the product at a settled price to the buyer in the agreement in future time. It is a financial contract that bounds the both entities, the buyer and the seller, for trading at a predetermined price of the commodities. It is used to lock the price of a commodity in advance if it is expected to rise or fall unexpectedly.
The value of the forward contract is based on the value of the commodity which is being dealt in the contract. If the value of a commodity falls at the purchase time it gets more valuable for the seller and if the price rises, then it becomes beneficial for the buyer who has saved his / her right to purchase the commodity at a price less than the market price. The forward and future contracts are often confused with each other, but they are clearly different from one another. Opposite to the future contract, the forward contract is a private contract and hasn’t any standardize format. Its terms and conditions vary from contract to contract. It has greater risk factor than the future contract.
Create your own Forward Contract by using the following template,
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