Forward contract.

In plain English

A forward contract is a direct deal between two parties to exchange something later at a price fixed today, negotiated off-exchange rather than through a listed market. Everything is negotiable: the amount, the date, the quality, and the settlement method. There is no exchange clearinghouse in the middle, so each side carries the risk that the other cannot pay when the date arrives. Nothing is settled along the way in most forwards, so all of the gain or loss shows up at once at the end. Businesses use forwards to lock a price on a currency or an input they know they will need.

01Why it matters

The custom terms fit a real business need exactly, and the price for that fit is counterparty risk that a cleared exchange would otherwise absorb.

02The math, step by step

An importer agrees today to buy 1 million euros in six months at 1.10 dollars each, a commitment of 1,100,000. If the euro is at 1.15 on the date, the forward saved 0.05 per euro, or 50,000. If it is at 1.05, the importer still pays 1.10 and is 50,000 worse off than the open market.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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