What Is a Forward Commitment?

A forward commitment is a contractual agreement to carry out a transaction in the future. A forward commitment will specify the commodity or goods being sold, the price, payment date, and 澳洲幸运5官方开奖结果体彩网:delivery date.

Forward commitments are contained within several types of 澳洲幸运5官方开奖结果体彩网:derivatives, including 澳洲幸运5官方开奖结果体彩网:forward contracts, 澳洲幸运5官方开奖结果体彩网:futures contracts, and swaps.

Understanding a Forward Commitment

Forward commitments enable two parties to reduce the risks and uncertainties around a planned transaction in the future. For example, a producer of a commodity like wheat knows he must sell his crop at some point after the harvest. A futures contract with a forward commitment allows the producer to find a buyer in advance, locking in the sale price for the producer and the buyer over that same time period. When used to lock in a price, this𝓀 is known as a forward hedge.

Forward commitments c෴an be traded in the form of derivatives contracts, particularly exchange-traded futures contracts. So,🍎 the agreement between the producer and the end customer may end up being traded between parties who have no direct interest in actually taking delivery of the underlying product.

Other Types of Forward Commitment

Forward commitments are closely associated with commodities due to their heavy use in futures markets, but the term generally applies to any arrangement in which two parties agree to the terms of a future transactio♈n well in advance of it o🍌ccurring.

Forward commitments can cover the future purchase of financial products or any other asset where two parties want to remove pricing volatility for a set period of time. Usually, a forward commitment is reserved for products for which there is a time lag between creation and sale, as with a 澳洲幸运5官方开奖结果体彩网:commodity that is extracted or harvested.

A forward commitment is also used with loans. Property builders may enter a forward commitment with a bank to lock in the interest rates and the terms of a loan prior to the loan actually being required for the development. This provides the borrower with the security of knowing they will have the funds when needed while giving the lender the ability to forecast future business more accu𒀰raꦛtely.

Forward Commitment Versus Contingent Claims

Derivatives can contain forward commitments or contingent claims. While a forward commitment contains an obligation to carry out the transaction as planned, a contingent claim contains the right to carry out t🔯he transaction but not the obligation. As a result, the payoff profiles between these derivatives vary, and that affects how the🅰 contracts thཧemselves trade.

The value of a derivative with a forward commitment will move more or ♛less in lockstep with the price of the underlying product. In contrast, a contingent claim derivative will increase or decrease wit𝔍h the likelihood of the right being exercised for a profit.