November 11, 2025
4 mins read
Forward markets are venues where buyers and sellers agree today to trade currencies, commodities or financial assets at a price agreed upon today for future delivery. Forward markets are often different from stock market transactions because a forward market is a private transaction (OTC). This means both parties are free to create their own agreements
These contracts are mostly used for two reasons: hedging and speculation. Hedging protects against unexpected price changes, while speculation involves taking risks for profit. In India, the Securities and Exchange Board of India (SEBI) now regulates forward markets, making sure that trading remains fair, transparent, and less prone to fraud.
A forward market helps people fix the price of things like currencies, commodities, or assets in advance. This prevents them from being surprised by future price changes. Unlike futures, forwards are more flexible.
Both parties can freely decide the price, amount, and delivery date. For example, a company expecting crude oil prices to rise can lock in today’s price. Even if prices increase later, they will pay only the agreed rate.
Forward contracts are over-the-counter (OTC), which means they are not traded on stock exchanges. This provides flexibility but also more risk, as there is no strict supervision over every deal.
A forward market works when two people or businesses agree today to buy or sell something in the future. They set the price, quantity, and date, protecting themselves from sudden changes.
These contracts are private, so they are not standardised like futures contracts. That makes them flexible but also risky, because if one party fails to pay, there is no exchange to protect the other.
Customised Contracts: Both sides can design the deal by choosing the quantity, settlement date, and price, instead of following fixed exchange rules. This makes the contract more personal and suitable for needs.
Settlement Options: Settlement can happen in two ways: either by paying cash or by delivering the actual product. Both sides decide the method when they make the contract together.
Risk Mitigation: Forward contracts help protect buyers and sellers from future price jumps. By locking in today’s price, they avoid unexpected costs later and gain better control over their expenses.
Unregulated Market: Forward contracts are not directly supervised by SEBI in the same way stock markets are. This gives freedom to trade but also increases risks of fraud or failure.
No Margin Requirement: You don’t need to deposit money as a margin, unlike in futures trading. But this also means there is higher risk if the other party cannot pay later.
Flexible Forward: This contract allows payment or exchange before or on the final date, giving freedom in timing. Businesses like it because it helps match payments with their actual cash needs.
Closed Outright Forward: In this type, the exchange rate is fixed today by adding a small premium to the spot rate. This ensures stability for both sides and avoids surprises later.
Non-Deliverable Forward: Here, no physical delivery takes place. Instead, the difference between the agreed price and the market price is settled in cash, making it easier to manage international transactions.
Long-Dated Forward: These contracts are similar to short ones but last much longer. They can stretch from a few months to several years, offering stability for long-term planning and commitments.
Tailor-Made Contracts: Forward agreements are adaptable and can be crafted towards specific requirements including product type, size of agreement, or delivery timeframe. This allows firms more control over how they conduct trades.
Risk Management: Companies use forward contracts to protect against changing prices. This hedging tool helps them avoid large losses and keep their future costs or earnings more predictable and stable.
Flexible Trading: Since forwards are OTC contracts, they allow private negotiations. Unlike fixed futures contracts, businesses can agree on terms that work best for their situation, giving them greater trading comfort.
Reduced Exposure: By locking in prices today, businesses can plan their cash flow more effectively. This reduces the chance of being caught off guard by sudden price swings in the future.
Earlier, the Forward Markets Commission (FMC) managed forward contracts and commodities trading in India. In 2015, it merged with SEBI, which now controls both forward and futures markets under one body.
Before the merger, FMC created rules, issued licences, and checked for fraud. It also trained traders about risks. Today, SEBI does the same work but with more power, ensuring fairness, safety, and transparency.
Basis of Difference | Forward Contracts | Futures Contracts |
Contract Type | Flexible, customised agreements between two parties. | Fixed, standardised contracts designed by the exchange with limited customisation. |
Regulation | Traded privately without strict monitoring, carrying higher risk. | Fully regulated by SEBI and exchanges, ensuring fairness and transparency. |
Settlement | Can be settled by cash or physical delivery of goods. | Usually settled in cash, offering a streamlined process but less flexibility. |
Margin Deposit | No margin deposit required, so no money is blocked upfront. | Requires margin deposits, adding security but increasing trading costs. |
Risk | Higher risk due to absence of central clearing and regulation. | Lower risk as exchanges enforce rules, collect margins, and ensure settlements. |
Forward markets allow individuals and companies to fix prices on trades that will happen in the future; thus, protecting them from rising or falling prices. Contracts that occur today will determine the future price for a specific quantity of an asset and have it delivered to a specified place (or not) at a specified time in the future.
Unlike futures, forward contracts are privately negotiated, and the contracts themselves are not standardized or regulated, which allows for additional flexibility to customize contracts. But this flexibility can come at an expense, as there is little protection if the counterparty prevents themselves from paying you.
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A forward market is an over-the-counter platform where parties agree to trade assets or financial instruments at a future date for a predetermined price.
Forward contracts work on the basis of an agreement that fixes the sale price of an asset. According to the agreement, the involved parties agree to sell or buy the asset as per fixed price on the specified future date. The contract can be customised to meet specific needs.
The main types include flexible forward, closed outright forward, non-deliverable forward, and long-dated forward contracts.
Forward markets deal in customised OTC contracts, while futures markets trade standardised contracts regulated by exchanges.
Forward markets allow parties to lock in prices for future transactions, reducing exposure to market volatility and providing flexibility in contract terms.
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