2025 Guide: Understanding Forward Commitment Derivatives - Prices & Types Explained
Explore the three key types of derivatives with forward commitments—forward contracts, futures contracts, and swaps—and how they operate in today's financial markets.
Derivatives are financial instruments whose values are based on underlying assets. Among these, derivatives with forward commitments involve agreements to buy or sell assets at a set price on a future date. The primary types of such derivatives include forward contracts, futures contracts, and swaps.
Forward Contracts
Forward contracts are private agreements between two parties to buy or sell an asset at a predetermined price on a future date. These contracts can be customized for any asset and delivery schedule. Their value is directly linked to the price of the underlying asset, making them a classic derivative instrument.
For instance, if Bank A plans to purchase one ton of gold in one year, and Bank B owns that gold and agrees to sell it at that time, they can enter a forward contract to fix the price and delivery date.
Futures Contracts
Unlike forward contracts, futures contracts are standardized agreements traded on regulated futures exchanges. They obligate the parties to buy or sell an underlying asset at a set price on a future date. The prices of futures contracts are derived from the underlying assets, and they also involve forward commitments.
Swaps
Swaps are derivative agreements where two parties exchange a series of future cash flows based on underlying financial instruments such as currencies or commodities. These contracts are tailored to meet the specific needs of the parties involved, with exchanges occurring at agreed future dates.
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