Posted by: Labdhi Mehta on Apr 30, 2018, 12.45 PM IST
1. Forwards are over the counter derivatives that enable the buying or selling of an underlying security on a future date, at an agreed price.
2. The terms of a forward contract are as agreed between counterparties and include: the underlying that is being bought or sold; the quantity of the underlying; the price agreed upon by the two parties; and the date of settlement.
3. There is an obligation for the buyer to pay for what has been bought and receive delivery thereof, and for the seller to give delivery of what has been sold and receive payment for the same.
4. The actual price at the time of settlement may differ from the price that was agreed upon.
5. If the market price at the time of settlement of the contract is higher than the agreed upon price, the buyer gains but the seller loses. If the price is lower, then the buyer loses but the seller gains.