What Is A Forward Contract, And Why Would I Need One?

Are you considering buying or selling assets in the future? One of the primary concerns is the unpredictable nature of price fluctuations. You wouldn’t want to commit to a purchase now, only to discover that the price has escalated later on.

This can place you in a challenging situation, potentially leading you to re-evaluate your decisions.

Fortunately, there is a solution – Forward Contracts. Let’s quickly examine what these contracts entail.

What Is A Forward Contract?

A Forward Contract essentially allows you to lock in a price to buy or sell assets at a future date, providing peace of mind against price volatility.

Such contracts are particularly useful for commodities like grain or dairy products, where prices can fluctuate unpredictably due to various factors. A Forward Contract is an excellent way to secure your price early on.

The contract typically specifies the following:

• Quantity of goods
• Date of the transaction
• Dispute resolution procedures
• Contract termination conditions

It may also include other pertinent terms based on your business relationship and the specifics of your agreement.

What Is The Difference Between A Forward Contract And A Futures Contract?

When considering the purchase or sale of assets at a future date, you might also contemplate a Futures Contract. Unlike Forward Contracts, Futures Contracts are traded on exchanges and represent another method for future asset transactions. So, what distinguishes them from Forward Contracts?

The primary distinction lies in the timing of payment. A Forward Contract is tailored to the parties involved and is settled at the contract’s conclusion. Conversely, a Futures Contract is a standardised agreement with set payment intervals and generally involves less risk than a Forward Contract.

Futures contracts are subject to more regulation than Forward Contracts, which are privately negotiated. A Forward Contract offers more flexibility, allowing you to customise the terms to suit both parties’ needs.

Therefore, when choosing between these contract types, consider your specific situation and your willingness to assume varying levels of risk.

Example Imagine Anita plans to sell 300,000 kiwifruits in the next 3 months but is concerned about potential price drops. To safeguard her finances, she enters into a Forward Contract with her bank, with payment due in 3 months. In the contract, they agree to sell the kiwifruits at $2.50 each. If the price drops to $1.80, which is below the agreed rate, the bank compensates Anita the difference, resulting in a payment of $210,000 to her. However, if the price increases to $4.10, Anita would owe the bank $480,000, as she must cover the difference between the market price and the contracted price.

Where Can I Get A Forward Contract?

It’s advisable to engage a lawyer to draft a Forward Contract to ensure it is customised to your needs. At Sprintlaw, our legal team collaborates with you to position you advantageously in negotiations.

Our Forward Contract package includes:

• A draft Forward Contract tailored to your business’s requirements
• Telephone consultations with a Sprintlaw lawyer
• A complimentary revision of the final draft we provide

Next Steps

If you need assistance with a Forward Contract, contact us, and we’ll guide you through the process.

For a consultation on your future options, reach us at 0800 002 184 or [email protected] for a free, no-obligation chat.

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