Forward Price

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Definition of 'Forward Price'

A forward price is a contract that obligates two parties to trade an asset at a specific price on a specific date in the future. The forward price is determined by the current market price of the asset, plus a premium that reflects the time value of money and the risk of holding the asset until the delivery date.

Forward contracts are used to hedge against the risk of price changes in an underlying asset. For example, a farmer may enter into a forward contract to sell corn at a specific price in the future. This protects the farmer from the risk that the price of corn will fall before the harvest.

Forward contracts can also be used to speculate on the future price of an asset. For example, an investor may buy a forward contract to purchase oil at a specific price in the future. If the price of oil rises, the investor will make a profit on the contract.

Forward contracts are traded on over-the-counter (OTC) markets. The terms of the contract are negotiated between the two parties, and there is no central exchange where forward contracts are traded.

Forward contracts are a type of derivative instrument. Derivatives are financial instruments whose value is derived from the value of an underlying asset. Other types of derivatives include futures contracts, options contracts, and swaps.

Forward contracts are often used in conjunction with other financial instruments to create more complex financial products. For example, a forward contract can be used to create a synthetic long or short position in an underlying asset.

Forward contracts can be a useful tool for managing risk or speculating on the future price of an asset. However, it is important to understand the risks associated with forward contracts before entering into a contract.

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