A Forward Contract is a customized financial agreement between two parties to buy or sell an asset at a predetermined price on a specific future date. Unlike futures contracts, forwards are traded over-the-counter (OTC) and not on organized exchanges, which means the terms ó such as quantity, price, and delivery date ó are privately negotiated.

The primary purpose of a forward contract is to hedge against price fluctuations in the future. For example, an exporter expecting payment in a foreign currency after three months may enter into a forward contract to lock in the current exchange rate, thereby reducing the risk of currency depreciation. Similarly, commodity producers and consumers often use forwards to stabilize revenues and costs in volatile markets.

One of the key features of a forward contract is its flexibility ó it can be tailored to meet the exact requirements of both parties in terms of asset type, quantity, and maturity date. However, this customization also introduces counterparty risk, since there is no central clearinghouse to guarantee performance. If one party defaults, the other may face significant financial loss.

In contrast to exchange-traded futures contracts, forward contracts are typically settled on the contractís expiration date rather than marked to market daily. Settlement can be done through physical delivery of the asset or cash settlement based on the price difference.

In summary, forward contracts are important financial instruments for managing future price uncertainty. They are widely used by corporations, importers, exporters, and institutional investors for hedging. However, due to their OTC nature and lack of standardization, they carry higher default and liquidity risks compared to exchange-traded derivatives, making proper risk assessment essential before entering into such agreements.