Investment in Forwards
Forwards – derivative financial instruments almost identical to the future contracts. This contract represents the parties committed to sell and buy the object at the predetermined time and price.
Difference between forward and future contracts is that forwards are not traded on stock exchanges and is just a matter of contract parties. Conditions of the forwards can be tailored to the needs of contracting parties as a result of negotiation.
Investment in forward contracts faces not only market risk, but also the risks that counterparty will not be able to fulfill its commitment. That‘s why credibility of other counterparty is so important.
Forward is not traditional investing instrument and shouldn’t be used a lot in investing process, but professional investors may use forwards for hedging or to achieve a better efficiency of investment portfolio.