We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- The forwards’ contract lays down the essential foundation for a futures contract.
- A Forward is an OTC derivative that is not traded on an exchange.
- Forward contracts are private agreements whose terms vary from one contract to another.
- The structure of a forwards contract is pretty simple.
- In a forward agreement, the party agreeing to buy the asset is called the “Buyer of the Forwards Contract.”
- In a forward agreement, the party agreeing to sell the asset is called the “Seller of the Forwards Contract.”
- A variation in the price would impact both the buyer and the seller of the forwards’ contract.
- Settlement occurs in two ways in a forward contract – Physical and Cash settlement.
- A futures contract reduces the risk of a forward contract.