A Forward, or Forward Contract, is an agreement to buy or sell a commodity at a fixed time in the future

Details

A Forward Contract involves two trading parties: a buyer and a seller. Our organization is one party, the other is the counterparty

A Forward Contract can involve almost any terms for quantity (Volume), quality, commodity, delivery period, delivery location, pricing and settlement

A Forward Contract may be executed directly with a counterparty, or through an intermediary (a broker)

Whether brokered or not, responsibility for delivery and settlement of a Forward Contract is usually directly with the counterparty (see Clearing for an exception)

Forward Contracts may be executed at a fixed price, or at a floating price:

• Fixed Price Forwards are settled at a strike price which is agreed as part of the trade
• Floating Price Forwards (Floating Forwards or Indexed Forwards) are settled at a price which is derived from a published index, or a combination of indices according to a pre-agreed formula

Forward contracts may be physically or financially settled:

• A physically settled Forward requires the seller to deliver the physical commodity at the time and place specified in the terms of the trade, the buyer is required to pay for the commodity at the price and time agreed in the terms of the trade
• A financially settled Forward requires the buyer and seller to compare the agreed strike price with an agreed valuation of the commodity at the time of delivery. If the strike price is higher than the valuation price then the buyer pays the seller the difference in price (per unit of the trade volume), otherwise the seller pays the buyer

A financially settled Forward is often referred to as a swap

A Forward is usually settled bilaterally between parties.

Forwards may be included in a netting agreement

Forwards may be included in a margining agreement

A Forward may be given up for clearing