What are forwards?
A forward contract is a private agreement between two parties obliging either the buyer or seller to purchase or offer an asset at a set price at a specified time.
This sounds much like the futures market so far, but where futures are largely standardised and transparent, forwards are custom built – terms agreed privately between buyer and vendor – and will usually vary from contract to contract. Due to this complexity in negotiated terms, these products cannot be traded on exchanges and makes them higher risk products.
It is difficult to estimate the size of the market because it is largely unregulated and contract details are only known between buyer and seller. But it’s thought to be very large, as many international companies use forwards to hedge currency exposure and interest rate risk.
Because there are no standardised product transactions over public exchanges, there is no easy access to the forwards market for retail investors.
Who wins?
Like futures, the forwards market is a straight bet between buyer and seller.
Test yourself
How do forward contracts differ from futures market?
- Forwards can’t be traded on exchanges
- Futures are largely standardised and transparent
- All answers provided are correct
- Forwards are custom built and will usually vary from contract to contract
