Glossary

A forward contract is a customised financial agreement between two parties to buy or sell an asset at a specified future date and price.

It is primarily used to hedge against the risk of price fluctuations or for speculation. Forward contracts are traded over-the-counter (OTC) and can be tailored to meet the specific needs of the parties involved, such as contract size, maturity, and underlying asset. 📝

For example, a company that expects to purchase a large quantity of a raw material in six months might enter into a forward contract with a supplier to lock in the price and avoid potential cost increases due to market fluctuations.

Fun fact: Forward contracts date back to ancient times, with evidence of their use in Mesopotamian societies for agricultural transactions as early as 1750 BC. They remain a popular risk management tool in modern finance. 🌾📜