Difference between revisions of "Forward contracts"

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A forward contract is a private, cash-market agreement between a [[buyer]] and [[seller]] for the future [[delivery]] of a commodity at an agreed upon price. Unlike [[futures contract]]s, forward contracts are not standardized and not transferable.<ref>{{cite web|url=http://www.cme.com/glossary/F.html|name=Glossary of Terms - Forward contract|org=CME|date=July 10, 2008}}</ref>  A [[clearing house]] does not stand between[[ buyer]] and [[seller]] to guarantee performance of a forward contract.<ref>{{cite web|url=http://www.financialpolicy.org/dscinstruments.htm|name=Primer - Derivative Instruments|org=Financial Policy Forum|date=July 10, 2008}}</ref>


A forward contract is a private, cash-market agreement between a [[buyer]] and [[seller]] for the future [[delivery]] of a commodity at an agreed upon price. Unlike [[futures]] [[contract]]s, forward contracts are not standardized and not transferable.<ref>{{cite web|url=http://www.cme.com/glossary/F.html|name=Glossary of Terms - Forward contract|org=CME|date=July 10, 2008}}</ref>  A [[clearing house]] does not stand between[[ buyer]] and [[seller]] to guarantee performance of a forward contract.<ref>{{cite web|url=http://www.financialpolicy.org/dscinstruments.htm|name=Primer - Derivative Instruments|org=Financial Policy Forum|date=July 10, 2008}}</ref>  
A '''non-deliverable forward''' is a cash-settled, short-term forward contract on a foreign currency or commodity, where the profit or loss at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. NDFs are often used in circumstances where there is low liquidity, such as to hedge local currency risks in emerging markets where local currencies are not freely convertible, or when there are restrictions on capital flows.<ref>{{cite web|url=http://lexicon.ft.com/Term?term=non_deliverable-forward-NDF|name=Non-Deliverable Forward|org=Financial Times Lexicon|date=March 28, 2014}}</ref>


== History ==
== History ==
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Standardized forward contracts were essentially the first [[futures contract]]s.  
Standardized forward contracts were essentially the first [[futures]] [[contract]]s.  


According to [[CME Group]]'s educational resources, in 1848 the Board of Trade of the City of Chicago was formed as a [[member]]-owned organization that offered a centralized location for cash trading of a variety of goods as well as trading of forward contracts. As business grew, it was decided that standardizing the contracts would streamline the trading and delivery processes.
According to [[CME Group]]'s educational resources, in 1848 the [[Board of Trade of the City of Chicago]] was formed as a [[member]]-owned organization that offered a centralized location for cash trading of a variety of goods as well as trading of forward contracts. As business grew, it was decided that standardizing the contracts would streamline the trading and delivery processes.


Market participants were asked to trade contracts that were identical in terms of quantity, quality, delivery month and terms as established by the exchange. The only thing left for traders to negotiate was price and the number of contracts.<ref>{{cite web|url=http://www.cme.com/edu/res/intro/futures/futrhist.html|name=History of Futures|org=CME|date=July 10, 2008}}</ref>
Market participants were asked to trade contracts that were identical in terms of quantity, quality, delivery month and terms as established by the exchange. The only thing left for traders to negotiate was price and the number of contracts.<ref>{{cite web|url=http://www.cme.com/edu/res/intro/futures/futrhist.html|name=History of Futures|org=CME|date=July 10, 2008}}</ref>


== References ==
== References ==
<references />
<references />


[[Category:Definitions]]
[[Category:Definitions]]

Latest revision as of 21:28, 28 March 2014


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A forward contract is a private, cash-market agreement between a buyer and seller for the future delivery of a commodity at an agreed upon price. Unlike futures contracts, forward contracts are not standardized and not transferable.[1] A clearing house does not stand betweenbuyer and seller to guarantee performance of a forward contract.[2]

A non-deliverable forward is a cash-settled, short-term forward contract on a foreign currency or commodity, where the profit or loss at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. NDFs are often used in circumstances where there is low liquidity, such as to hedge local currency risks in emerging markets where local currencies are not freely convertible, or when there are restrictions on capital flows.[3]

History[edit]

Standardized forward contracts were essentially the first futures contracts.

According to CME Group's educational resources, in 1848 the Board of Trade of the City of Chicago was formed as a member-owned organization that offered a centralized location for cash trading of a variety of goods as well as trading of forward contracts. As business grew, it was decided that standardizing the contracts would streamline the trading and delivery processes.

Market participants were asked to trade contracts that were identical in terms of quantity, quality, delivery month and terms as established by the exchange. The only thing left for traders to negotiate was price and the number of contracts.[4]

References[edit]