A 'forward' is a contract agreed between two parties whereby one agrees to deliver a specific quantity of an asset say one ton of aluminium on an agreed date and the other agrees to pay a fixed price for it on that date. The buyer of a forward might be a manufacturer worried about the market price of aluminium rising and the seller might be a producer worried about the opposite.
By locking in a price for 'forward delivery', both solve their respective price worries. What's more, the buyer ensures they can actually get hold of aluminium on the delivery date, should there be a shortage, or they can sue the seller for non-delivery. Forwards can be standardised and traded on commodities exchanges too. Usually they are then called futures contracts.
See Tim Bennett's video tutorial: What are futures?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
AI will maintain Moody’s market leadOpinion Veteran data provider Moody's has adapted well to the modern world, and is one of Warren Buffett’s longest-held investments
-
Larger homes drive house price growth – HalifaxThe average cost of a house in Britain is more than £10,000 higher than last year, according to the latest house price index
