Types of Derivatives-Cont’d Forward Contracts
A forward contract gives the holder the obligation to buy or sell a certain underlying instrument (like a bond) at a certain date in the future (i.e., the delivery
or final settlement date, at a specified price (i.e., the settlement price.
The traditional forward contract is a private agreement between the two parties and nothing happens between the contracting date and the date of delivery. No payment takes place until maturity. Forward contracts are the building blocks for futures and swaps. Futures contracts are forward contracts traded on organised exchanges. Swaps are forward contracts in which counterparties agree to exchange streams of cash flows according to predetermined rules.
