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Forward Contracts

Discuss Forward Contracts within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of ...

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Sunanda K. Chavan
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Forward Contracts - October 19th, 2010

A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price.
The buyer of the contract has the right and obligation to buy the commodity and the seller of the contract has the right and obligation to sell the commodity. On the day of delivery, the ownership of the contract will change from the buyer to the seller and the payment for the price made. A forward is the oldest and the simplest form of s derivative contract.
The forward price in a forward contract is determined by the following equation :
FORWARD PRICE = CASH PRICE + COST OF CARRY
Where the cost of carry is the amount to be spent for storage, transport, insurance, financing cost, etc., or in other words, the amount by which the future price exceeds the cash price.
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