¿QUE ES UN FORWARD ?

What is a Forward Contract?

This section explains the concept of a forward contract, a long-term financial product where two parties agree on conditions for a future transaction.

Understanding Forward Contracts

• A detailed example illustrates how forward contracts work, using the scenario of an agricultor needing to secure the price of wheat before harvest.

• The agricultor can reduce risk by selling the crop at a fixed price in advance. Conversely, a baker can hedge against future wheat price uncertainty by buying wheat now for future delivery.

• The agricultor and baker agree on a price for future wheat delivery. The forward contract specifies the quantity and price regardless of spot prices at delivery.

Types and Characteristics of Forward Contracts

• Forward contracts are similar to futures contracts but are traded over-the-counter, not on organized exchanges.

• Three types of forward contracts exist: those with no profits, fixed returns, or reinvested profits based on market conditions.

• Delivery in forward contracts can involve physical exchange or cash settlement based on agreed-upon values.

Risks and Backing of Forward Contracts

• The main risk in forward contracts is ensuring both parties fulfill obligations; hence, many transactions are backed by stored goods or special warehouses.