Financial Jargon Buster Dictionary

This glossary is provided for information only and is not regulated by the Financial Services Authority.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Forward Contract

A cash market transaction in which two parties agree to the purchase and sale of a commodity (including exchange rates) at some future time under such conditions as the two agree. In contrast to futures contracts, the terms of forward contracts are not standardised, a forward contract is not transferable and there is no margin or collateral requirement to assure performance of the contract.

A forward contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future. The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders where the time of trade is not the time where the securities themselves are exchanged.

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. The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party.

This process is used in financial operations to hedge risk, as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive.

A closely related contract is a futures contract; they differ in certain respects.