Online Forwards Homework Solutions Every Student Needs to Find
Understanding the base of the subject
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What is a Forwards Contract?
A forwards contract is an agreement between two parties which creates a legal obligation for one party or the buyer to purchase an asset. The price of the asset is set at a future point in time. The price which is set among the two parties is agreed and fixed at a reasonable rate.
The party which agrees to buy the asset in the future assessment is called the long position and the party which agrees to sell the asset is called the short position. The price agreed by both the parties on the buying and selling of the underlined asset is called the delivery price.
How is a forwards contract different from a future contract?
Both are derivatives which look similar on paper and both sounds the same and can be mistaken for the same as well. However, when the technical aspects of both the definitions are looked upon, they are a lot more different than each other. Here are some of the few differences given below in listed points.
- Futures contracts traded on exchanges are more liquid in nature to that of forwards contracts. The trade made can be assessed immediately without any delay in the timing. In a forwards contract, the buyer as to settle on a particular date to assess the trade business.
- There is actual trade transparency presented in futures contract and lets the buyer be protected from fraudulent activities. In forwards contract, the buyer and the contractor trade over-the-counter and there are no such speculations regulating them.
How does forwards contract works?
If you wish to sell 400 grams of rice in the coming year, you can sell your rice for whatever price is when you actually harvest it. Or you could just settle on a price by selling them to a forward contract that creates an obligation for you to sell those 400gm for a fixed price.
By settling on a fixed price, you are eliminating your chances of facing a risk when there are fluctuations in the price of rice in the market. However, there are always chances of overpaying or underpaying depending on the price of rice on the current market.
Importance of forwards contract
When two parties agree on a stipulated price to conduct a trade for their futures assessments, this price becomes reasonable to settle on. The contracted price is kept at a hold regardless of the fall or rise of the actual price in the market. Here are some of the other advantages of using forward contract, given below in points.
- Protection against exchange rate fluctuation
Exchange rate fluctuation is common due to the rise in imbalances between the demand and supply in the market. The forwards contract is settled on a particular price which does not change regardless of the whole scenario in the exchange rate.
- Risk hedging
Risk management is important to settle on a deal. The primary focus of the managers is to eliminate the possibilities of excessive risk and forwards contracts can help them achieve that.
- Quality of the product
Forwards contracts involve a proper inspection of the items being bought by the contractor which helps them to understand the quality of the products. The seller thus agrees to pay a price as long as the contract states quality reaches a minimum agreed upon-level.
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