Forward is an Over-The-Counter Derivative contract to buy or sell the underlying asset
Example: X and Y are entering into Derivative contract to buy and sell Gold after 3 months at a price agreed today. They both have derived the price today, which will be executed after 3 months for the price agreed today. There is stock exchange present in this case. It is a privately negotiated contract between the two counterparties. Such contracts are called Forward contracts.
Characteristics/Features of Forward:
1. Traded Over-The-Counter as it is privately negotiated.
2. Highly customized as the counterparties can fix the expiry date and quantity as per their agreement.
3. No initial margin is required.
4. High risk of default as any counterparty can default the contract
5. Physical settlement takes place, which means, the underlying assets will be delivered by the seller to the buyer.
