Forward Contracts are one of the most commonly used forms of trading commodities. Also referred to as futures contracts, forward contracts are used by many commodity traders. They are based on the expectation that a transaction will take place at a later date and time. The buyer of a forward contract agrees to purchase an item at a future date and time for a price agreed upon at the start of the contract. The seller of the forward contract agrees to sell an item at a future date and time for a price agreed upon at the start of the contract. In other words, forward contracts allow buyers and sellers to enter into an agreement about future transactions.A forward contract is used to send money from the buyer to the seller. To establish a forward contract, firstly, both parties agree on the price at which they will trade. The buyer will transfer their money — also known as their margin — to an exchange where they will trade their commodity of choice against another commodity they own in equal value. Once both parties agree on a price for their transaction, they will proceed with making their transaction validating their agreement with exchanging money for their commodity of choice. Once this happens, a record is made in reference books known as futures indexes showing that this has successfully occurred and that there is now enough money in place for the seller to make their delivery at the agreed-upon time in future.Forward contracts are commonly used by commodity traders who want to hold onto their commodities until they are required by buyers.For example: some farmers want to sell their produce in future months so that it can be consumed during Lent or other periods when people abstain from eating meat or animal products. To hold onto these commodities until someone is willing or able to purchase them, traders use forwards contracts.By using these contracts, farmers can have more freedom over when they sell their produce— rather than having it dictate when they buy food themselves or sell it to others for profit. Forward contracts can also be used by businesses who want to secure fixed costs such as salaries or utility payments for certain periods in advance— offering greater predictability and control over how they spend funds.
