Forward contract - Financial definition
Financial acronyms
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Concise definition of the term forward contract
A contract entered into by two parties who agree to the future purchase or sale at an agreed price of a specified asset. One of the parties to the forward contract assumes a long position and agrees to buy the asset, the other assumes a short position and agrees to sell the asset.
Comprehensive definition of the term forward contract
An example for the use of forward contracts would be a UK company which will receive a payment in USD in 3 months time. In order to hedge against an unfavourable change in the exchange rate, the company can sell USD forward.
The downside of the use of a forward contract compared to the use of an option for example is the fact that, should the USD have moved favourably, a company would have missed out on a potential profit.
A currency option would have provided for more flexibility, but at the cost of the option premium to be paid.