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A forward contract is a private agreement between two parties to buy or sell an asset at a predetermined price on a predetermined date in the future. It is a non-standardised contract, where parties customise its terms to fit their needs. Forward contracts are mostly used in the commodities market, but they can also be used in the stock, forex, and bond markets. They aim to help traders manage the risks associated with fluctuating asset prices.
Any investor or business can purchase a forward contract if they wish to lock in a price early as they anticipate a change in market prices in the future. Investors and businesses may also use forward contracts to hedge existing positions, to protect themselves against potential losses. By agreeing on a fixed price on a future trade, they can manage risk and uncertainty, especially in volatile markets.
A coffee shop owner needs to purchase a large supply of coffee beans every quarter, and they have a rough idea of how much the beans typically cost. They monitor the market and believe that the price of coffee beans will increase in the future, and they want to lock in a price now to ensure they can afford to purchase the beans later.
The coffee shop owner can enter into a forward contract with a supplier. In this case, they can specify the amount of coffee beans they would like to purchase four months later, at a price fixed at the time of creating the contract, agreed upon by the supplier.
With the forward contract in place, the coffee shop owner can purchase his share of coffee beans from the supplier at the fixed price regardless of the future price of the beans. The supplier is also guaranteed to receive the fixed price for the beans on the delivery date, regardless of the market price then.
ADSS offers a range of global markets for traders, with opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.
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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
ADS Securities LLC – S.P.C (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates under First Category: Dealing in Securities and Fifth category: Arrangement and advice (Introduction). ADSS is a Limited Liability Company – Sole Proprietorship Company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.
The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.
ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.
