BANKING AFFAIRS

Detailed explanation-1: -A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.

Detailed explanation-2: -Forward Contracts can broadly be classified as ‘Fixed Date Forward Contracts’ and ‘Option Forward Contracts’. In Fixed Date Forward Contracts, the buying/selling of foreign exchange takes place at a specified future date i.e. a fixed maturity date.

Detailed explanation-3: -Example of a Forward Contract Suppose you are a farmer and you want to sell wheat at the current rate of Rs. 18, but you know that wheat prices will fall in the coming months ahead. In this case, you enter a contract with a grocery for selling them a particular amount of wheat at Rs. 18 in three months.

Detailed explanation-4: -Forward contracts can involve the exchange of foreign currency and other goods, not just commodities. For example, if oil is trading at $50 a barrel, the company might sign a forward contract with its supplier to buy 10, 000 barrels of oil at $55 each every month for the next year.

Detailed explanation-5: -A forward contract is a type of derivative. A derivative is an investment contract between two or more parties whose value is tied to an underlying asset or set of assets. For example, commodities, foreign currencies, market indexes and individual stocks can all be underlying assets for derivatives.