A forward contract is a financial agreement between two parties to buy or sell an asset, such as commodities, currencies, or other financial instruments, at a specified future date for a price agreed upon today. Unlike standardized futures contracts traded on exchanges, forward contracts are customized agreements negotiated directly between the buyer and the seller. Here are the key features of forward contracts:

• Customization: Forward contracts are tailor-made to meet the specific needs and requirements of the contracting parties, allowing flexibility in terms of contract size, expiration date, and other terms.
• Private Agreement: These contracts are typically private and traded over-the-counter (OTC), meaning they are not standardized and are negotiated directly between the buyer and seller.
• No Intermediary: Unlike futures contracts, there is no intermediary clearinghouse involved in a forward contract. The counterparty risk is borne by the contracting parties themselves.
• Payment at Expiry: Settlement of a forward contract occurs at the contract’s expiration date, where the buyer pays the agreed-upon price to the seller, and the seller delivers the asset.
• Limited Secondary Market: Forward contracts are not easily transferable, and there is typically no established secondary market for them. Both parties are obligated to fulfill the terms of the contract unless they mutually agree to cancel or offset it.

Forward contracts are widely used by businesses and investors to manage and hedge against the risks associated with price fluctuations in various financial markets, commodities, or currencies. While they offer flexibility, customization, and tailored risk management, they also expose participants to counterparty risk and lack the liquidity and transparency found in standardized exchange-traded futures contracts.