Forward contract
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 on at the time of conclusion of the contract, making it a type of derivative instrument. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. 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 price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders where the time and date of trade is not the same as the value date where the securities themselves are exchanged. Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive. The value of a forward position at maturity depends on the relationship between the delivery price () and the underlying price () at that time. For a long position this payoff is: For a short position, it is: Since the final value (at maturity) of a forward position depends on the spot price which will then be prevailing, this contract can be viewed, from a purely financial point of view, as "a bet on the future spot price" File:Long_forward_payoff.png File:Short_forward_payoff.png Suppose that Bob wants to buy a house a year from now. At the same time, suppose that Alice currently owns a 104000 (more below on why the sale price should be this amount). Alice and Bob have entered into a forward contract. Bob, because he is buying the underlying, is said to have entered a long forward contract.