forwards

(noun)

A non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today.

Related Terms

Examples of forwards in the following topics:

  • Spot Rates, Forward Rates, and Cross Rates

    • Spot & forward rates are settlement prices of spot & forward contracts; cross rates are the exchange rate between two unofficial currencies.
    • A spot contract is in contrast with a forward contract where contract terms are agreed now but delivery and payment will occur at a future date.
    • The settlement price of a forward contract is called a "forward price" or "forward rate. " Depending on the item being traded, spot prices can indicate market expectations of future price movements.
    • In other words, spot rates can be used to calculate forward rates.
    • If the underlying asset is tradeable, the forward price is given by:

  • Types of Exchange Hedges: Forward, Money Market, and Future

    • Forwards, money market instruments, and futures are common instruments used to manage exchange risk.
    • In finance, a forward contract, or simply a forward, is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today.
    • The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.
    • The same mechanism functioning in forward contracts applies to futures.
    • Forward contracts are very similar to futures contracts, except they are not exchange-traded, or defined on standardized assets.

  • Overview of Derivatives

    • The most common types of derivatives are forwards, futures, options, and swaps.
    • Products such as swaps, forward rate agreements, exotic options - and other exotic derivatives - are almost always traded in this way.
    • The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.
    • The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party.
    • On the other hand, the forward contract is a non-standardized contract written by the parties themselves.

  • International Financial Securities

    • First form is a forward contract.
    • Furthermore, a forward contract is a tailor-made contract, and international banks usually write forwards for foreign currencies.
    • Another derivative, similar to a forward, is a futures contract.
    • For instance, a forward-forward swap means a firm and a bank exchange two forward contracts with each other.
    • The key to understanding a forward-forward swap, the exchange involves two cash flows, and a forward contract protects each cash flow.

  • Chapter Questions

    • Define a currency swap with a ‘spot against a forward. '

  • Interest Rate Parity Theorem

    • Investors use Interest Rate Parity Theorem to price forward contracts.
    • A forward contract's price originates from interest rate difference between countries.
    • Forward contract issued today at time t for currency delivery on a future specific date on T is F.
    • International investors use arbitrage to price a forward contract.
    • Spot exchange rate is $0.0127 per yen while a one-year forward contract equals $0.0120 per yen.

  • Measuring and Protecting against Economic Exposure

    • The Forward Price is the exchange rate in the forward contract while the Exchange Rate is the spot exchange rate for a state.
    • We purchased a forward contract with a price of $1.25 per euro.
    • If State 2 occurs, the forward rate equals the spot rate, so we neither gain nor lose anything.
    • Since each state is likely to occur, we, on average, break even by buying the forward contract.
    • Consequently, you could hedge against the exchange rate risk by purchasing a forward for 2,000 € and not the amount for the ($\beta$).By deciding to charge the same rent, you can use a forward to protect this amount.

  • Futures and Forward Contracts

    • First class of derivatives is futures and forward contracts.
    • However, futures differ from forwards.
    • A forward contract is tailor made that banks or dealers issue.
    • (A forward contract may not have a margin account).
    • Futures and forward contracts can reduce exchange rate risk.

  • Forward and Spot Transactions

    • However, forward transactions delay the exchange of money and assets to a future date.
    • Common derivatives are futures, forwards, options, Credit Default Swaps, and currency swaps.

  • Chapter Questions

    • Your company enters a three-month forward rate that fixes the exchange rate to $1 / 1 CD
    • Your company enters a forward contract that fixes the exchange rate to $1 / 12 pesos.