What is a forward contract?

A forward contract is a private agreement between a buyer and a seller that requires the buyer or seller to buy or sell an asset at a fixed price at a specified time.

This sounds a lot like a futures market, but futures are largely standardized processes and transparent operations, while forward contracts are privately customized, with all terms agreed upon by buyers and sellers, it usually varies with the contract. Due to the complexity of the agreed terms, these products cannot be traded on exchanges, further increasing their risk.

The size of the market for forward contracts is difficult to estimate because it is largely unregulated and the details of the contracts are known only to buyers and sellers. But it is widely seen as huge, as many multinationals use forward contracts to hedge against currency and interest rate risk.

Since there is no standardized product trading on public exchanges, it is difficult for retail investors to get involved in the forward contract market.

Who is the winner?

Like futures, the market for forward contracts is a direct bet between buyers and sellers.