Forward Contract
A private, customizable agreement to buy or sell an asset at a fixed price on a future date.
What is Forward Contract?
A forward contract is a private agreement between two parties to buy or sell an asset at a specified price on a future date. Unlike exchange-traded futures, forwards are over-the-counter (OTC) instruments that can be fully customized — parties choose the asset, quantity, price, and settlement date. Because forwards are not exchange-traded, they carry counterparty risk: if one party defaults, the other has no exchange guarantee. Forwards are widely used in currency and commodity markets; corporations use them to lock in exchange rates or raw material costs months or years ahead. Settlement can be either physical delivery of the asset or cash settlement for the difference between the agreed price and the spot price at maturity.
Example
A US company expects to receive €5 million from a European customer in 90 days. The company enters a forward contract with its bank to sell €5 million at today's forward rate of 1.10 USD/EUR, locking in $5.5 million regardless of how the euro moves over the next three months.
Source: BIS — OTC Derivatives Statistics