Why do you want to use a forward contract?
is April second, 2016 and you want to a transaction at a future
, for instance August 31th, 2016.
Assume that you hold an asset with current spot price
that you would like to
sell on the August 31th, 2016.
You could wait until that future date and then do the transaction at the prevailing
In other words, you do a
transaction in the future at time
However, this will leave you with considerable
price fluctuation risk
as the market
price of you asset will most likely move from today time
until August 31th, 2016.
One way of eliminating this risk is to enter a forward contract today, to sell your asset in
In other words, you look in the terms of you transaction already today to fully
eliminate any price movement risk.
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