What is forward contract? (please write everything about forward contract in very simple language that anybody...

What is forward contract?

(please write everything about forward contract in very simple language that anybody can understand it)

200 words please

Expert Solution

Solution ) Forward contracts are contracted in which risk of fluctuating prices of the particular commodity in the future is minimized by entering into a contract to buy or sell a particular commodity at a future date at a price that is prevailing in the present market or a specified price. Forward contracts are the forms of derivatives that deal in future trade. Consider the following example to understand the functioning of the forward contract. Mr X want to buy the wheat at the end of the month in the future. Suppose the present price of the wheat in the market is $1000 for 100 kgs. Due to highly fluctuating prices of wheat, he enters in the forward contract with Mr Z to buy wheat after one month at $1100 for 100 kgs. The benefits of entering in the forward contract are that if the price fluctuates after one month at $1500 for 100 kgs, Mr X will get that wheat at the price, he entered in the forward contract i.e, $1100 for 100 kgs after the period of one month in the future. With the forward contract, he saves $1500 - $1100 = $400 after the one month when he is actually buying the product. In forwarding contract, actual buy or sell of the commodities takes place at a pre-determined future date at the prices decided among the parties to the contract at the time of entering into the contract

ekkarill92 answered 6 months ago

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