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Forward Contract is an agreement between two parties - a buyer and seller. The buyer agrees to buy an underlying asset from the other party (the seller). The delivery of the asset occurs at a later time, but the price is determined at the time of purchase.
Benefits of forward contracts are:
Highly customized - Both parties can determine and define the terms and features to fit their specific needs, including when delivery will take place and the exact identity of the underlying asset.
All parties are exposed to default risk - This is the risk that the other party may not make the required delivery or payment.
Transactions take place in large, private and largely unregulated markets consisting of banks, investment banks, government and corporations.
Underlying assets can be a stocks, bonds, foreign currencies, commodities or some combination thereof. The underlying asset could even be interest rates.
They tend to be held to maturity and have little or no market liquidity.
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