Listen to a Business English Dialogue About Forward contract
John: Hi Violet, do you know what a “forward contract” is in business and finance?
Violet: No, I’m not familiar with it. What does it involve?
John: A forward contract is an agreement between two parties to buy or sell an asset at a specified price on a future date, regardless of the current market price.
Violet: So, it’s like making a deal now for something to happen later?
John: Exactly. It’s often used by businesses to hedge against price fluctuations or by investors to speculate on future price movements.
Violet: Can you give an example of how a forward contract works?
John: Sure, let’s say a farmer agrees to sell 100 bushels of wheat to a bakery at $5 per bushel in six months. They enter into a forward contract, ensuring the farmer a fixed price for their wheat and the bakery a guaranteed supply.
Violet: Are forward contracts standardized?
John: No, forward contracts are customized agreements between the two parties involved, allowing them to tailor the terms to their specific needs and preferences.
Violet: How do forward contracts differ from futures contracts?
John: While both forward and futures contracts involve agreements to buy or sell assets in the future, forward contracts are traded over-the-counter (OTC) and are not standardized like futures contracts, which are traded on organized exchanges.
Violet: Can forward contracts be canceled or renegotiated?
John: Generally, forward contracts are legally binding agreements, so they cannot be canceled or renegotiated unless both parties agree to amend the terms.
Violet: Are there any risks associated with using forward contracts?
John: Yes, there are risks such as counterparty risk, where one party may default on their obligation, as well as market risk, where the asset’s price moves against the party’s position.
Violet: Thanks for explaining, John. Forward contracts seem like a useful tool for managing risks and securing future transactions.
John: You’re welcome, Violet. They’re an important part of risk management and financial planning for many businesses and investors.