what is a forward contract

A forward contract 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. Unlike futures contracts, forward contracts are not exchange-traded, or defined on standardized assets. They can be customized to a specific commodity, amount, and delivery date. The parties involved in a forward contract negotiate the exact terms of the contract, and it is privately negotiated and comes with a degree of default risk since the counterparty is responsible for remitting payment. Forward contracts can be used for hedging or speculation, although their non-standardized nature makes them particularly apt for hedging. They can be used to lock in a specific price to avoid volatility in pricing, and they enable the participants to lock in a price in the future, which can be very important, especially in industries that commonly experience significant volatility in prices. However, forward contracts have a significant counterparty risk, which is also the reason why they are not readily available to retail investors.