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Forward contract

 

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A Forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. One party agrees to buy, the other to sell, for a forward price agreed in advance.

In a forward transaction, no actual cash changes hands. If the transaction is collaterised, exchange of margin will take place according to an pre-agreed rule or schedule. Otherwise no asset of any kind actually changes hands, until the maturity of the contract.

The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes hands (on the spot date, usually next business day).

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