Knowra Forward contract Forward contract A forward contract is a customized agreement to buy or sell an asset at a specified price on a future date, usually negotiated privately over the counter.
Forward price : The delivery price agreed in a forward contract, set so the contract has approximately zero value when initiated. It is the negotiated price that fixes the contract’s future exchange.
Futures contract : A standardized exchange-traded contract obligating parties to transact an asset at a future date and agreed price. Futures share forward-like exposure but use standard terms, margin, and daily settlement.
Foreign exchange forward : An agreement to exchange specified amounts of two currencies at a set rate on a future date. Businesses use it to lock in the exchange rate for a later payment or receipt.
Spot price : The market price for an asset bought or sold for near-immediate delivery. The forward price is related to today’s spot price and the costs of carrying the asset.
Over-the-counter market : A decentralized market where financial instruments are traded directly between parties rather than on a centralized exchange. Forwards are commonly negotiated in this market, allowing tailored terms but less standardization.
Forward rate agreement : An over-the-counter contract that settles the difference between a fixed interest rate and a reference rate for a future period. It applies forward-contract terms to future interest payments, usually through cash settlement.
Options contract : A contract giving its buyer the right, but not the obligation, to buy or sell an asset under specified terms. Unlike a forward, an option lets its holder decline the transaction.
Commodity market : A market where raw materials and primary products are bought and sold. Producers and buyers use forwards to set prices for future commodity deliveries.
Cost of carry : The net costs and benefits of holding an asset until a future date, including financing, storage, and income. Carry helps explain how spot prices and forward prices are connected.
Credit valuation adjustment : An adjustment to a derivative’s value reflecting the possibility that a counterparty will default. A forward’s value can depend on the credit quality of its bilateral counterparty.
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