What is a forward contract?

A forward contract is a customizable derivative contract between two parties to buy or sell an asset at a specified price on a future date. Forward contracts can be tailored to a specific commodity, amount, and delivery date. Forward contracts do not trade on a centralized exchange and are considered over-the-counter (OTC) instruments.

What is a non-deliverable forward contract?

A non-deliverable forward contract doesn’t include any physical exchange of assets; it means that instead, two parties only exchange cash for settling the contract. The outstanding amount to be paid depends on the price specified in the contract – the forward price and the asset’s current market value.

What are the underlying assets of a Forwards contract?

Similarly to futures contracts, the underlying assets of forwards can be different types of commodities like energy: oil, gasoline; metal: gold, silver, copper; agricultural products: wheat, sugar, coffee, cotton, grains; or livestock: cattle, lean hogs, etc.

How do you calculate the price of a forward contract?

The price of a forward contract, which is often known as the forward rate, is obtained by adding /subtracting the forward points to/from the spot rate. Forward points are calculated based on the difference in the interest rates of the two currencies that are to be traded. A forward point is 1/10,000 or 0.0001 of the spot rate.