FINANCIAL

DERIVATIVES

FORWARD CONTRACTS

Balram Chaudhary
Asst Professor
JVW University, Jaipur
FORWARD CONTRACT
 Forward contracts are used mostly
 We decide the price and delivery time now but pay at the
time of physical delivery
 Some daily life examples of forward contract are like:
Booking a movie ticket, Booking an auto in advance
 Forward contracts used by firms are like
 In November a farmer may agree to sell 20 tons of wheat at
Rs 20 per kg to a rolling mill to be delivered in April next
 An investor in stock market may want to sell 10,000 shares of
Reliance Industries Ltd today to be delivered one month later
at Rs 2,500 per share that is negotiated today
MOTIVE FOR FORWARD CONTRACT

 It helps the parties to reduce the risk

 It transfer the risk from hedgers to the speculators
 Example can be taken of a contract between Pepsi and
farmers for the potatoes
 Both parties will know the price in advance
FEATURES OF FORWARD CONTRACT
 Two Parties
 Over the Counter Product

 The price is determined today

 Mutual obligation to perform

 Counter party risk

 Mutual consent for concell