What are futures contracts & forward contracts?

Futures contracts and forward contracts are agreements to buy or sell an asset at a specific price at a specified date in the future. These agreements allow buyers and sellers to lock in prices for physical transactions occurring at a specific future date to mitigate the risk of price movement for the given asset through the date of delivery.

What is the difference between a future and a forward?

Just like futures, forwards are legally binding and obligate investors to buy or sell the underlying asset at a fixed price determined in the contract, however, they are settled only when the contract expires, as opposed to at the end of each day like for futures.

What is a forward contract and hedging?

When a forward contract is signed, one party agrees to sell (the supplier), and the other party consents to buy (the company) the underlying asset at a set price at a set future date. Hedging means using financial instruments such as derivative contracts to reduce future risk from increasing prices.

What happens if a forward contract is not used?

If the forward contract is not used, the price of the textiles could increase, and the business may not have the funds to pay for the order when it arrives. A forward contract will fix the price that the customer pays for its future order on a specific date.