Question

What is forward contract?

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

200 words please

Answer 1

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