In short
A forward contract is a private agreement to buy or sell an asset, such as a foreign currency, at a set price on a future date. It is customized and settled at the end of the term.
Key takeaways
- Its fair value is usually zero at inception, so nothing is paid upfront.
- Futures contracts are standardized, traded on exchanges and settled daily.
- Forwards carry credit risk that the other party won't perform.
Where it's tested
BAR: Derivatives & Hedge Accounting — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A forward contract entered into at current market rates normally has what fair value at inception?