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Forward Market

The forward market is an over-the-counter (OTC) market where forward contracts are traded, allowing buyers and sellers to lock in prices for future transactions of financial instruments, commodities, or currencies. Forward markets are crucial for businesses and investors to hedge against future price volatility and manage financial risk. Unlike futures markets, forward markets are not standardized, providing flexibility in contract terms but also increasing counterparty risk.

Example

A company uses the forward market to secure an exchange rate for converting foreign currency payments it expects to receive in six months, mitigating the risk of adverse currency movements.

Key points

• OTC market for trading forward contracts on various assets.

• Used for hedging or speculative purposes to manage future price risk.

• Contracts are customizable but carry higher counterparty risk.

Quick Answers to Curious Questions

It allows participants to hedge against future price changes, stabilizing costs or revenues linked to volatile assets like commodities or currencies.

The forward market deals with customized contracts, lacks standardized terms, and operates OTC, unlike the highly regulated and standardized futures market.

Lack of standardization and counterparty risk can make forward contracts less transparent and secure than exchange-traded futures contracts.