Forward Contract is a financial agreement between two parties to buy or sell an asset at a predetermined price on a future date.
How It Works:
- Two parties agree on a price and future date.
- The contract locks in the price in advance.
- Market prices may change over time.
- On the agreed date, the transaction is completed at the fixed price.
Benefits:
- Protects against price fluctuations
- Helps in financial planning
- Reduces risk in international trade
- Useful for currency and commodity hedging
Example:
An exporter locks a currency rate today for a payment that will be received after 60 days to avoid exchange rate risk.