
Buying Forward
Buying forward is when an investor negotiates the purchase of a commodity at a price negotiated today but takes actual delivery at some point in the future. While futures contracts are standardized, trade on major exchanges, and have clearinghouses that guarantee the timely and complete delivery of the transactions; forward contracts lack a centralized clearinghouse and, therefore, can pose a higher degree of default risk. In contrast with standard futures contracts, a forward contract can be customized to any commodity, amount, and delivery date, and is generally a private arrangement. Buying forward is when an investor negotiates the purchase of a commodity at a price negotiated today but takes actual delivery at some point in the future. Buying forward allows the investor to lock up the commodity or security at a lower price now and then sell when prices rise.

What Is Buying Forward?
Buying forward is when an investor negotiates the purchase of a commodity at a price negotiated today but takes actual delivery at some point in the future. Investors and traders buy forward when they believe the price of a commodity is going to increase in the future.
The concept of buying forward commonly applies to currencies as well as commodities, and can also be done for almost any security using a forward contract.



Understanding Buying Forward
Buying forward is a strategic decision an investor may make when they anticipate a rise in prices or an increase in the demand levels for a particular good or security. Buying forward allows the investor to lock up the commodity or security at a lower price now and then sell when prices rise. Depending on how buying forward is done, the contract to purchase the good or security can be sold to another party that is taking actual delivery.
Buying forward used to involve buying a good when it was plentiful, stockpiling it, and then selling when the supply dwindled. This could be done for some commodities, but not all. The market evolved over time and the forward contract replaced much of the physical stockpiling. A forward contract is a customized contract between two parties that specifies the asset to be purchased at a later date, along with the agreed-upon price.
Forward contracts can have a strong impact on the market for a particular good because they influence production. For example, meat and livestock tends to see seasonal production gluts and dips due to the natural breeding seasons. If, however, producers see a lot of buying forward through contracts, they can alter their breeding cycles to fall in line.
This type of buying forward usually requires paying a premium to incentivize off-season production at first, but over time the clear market signal will benefit both buyers and sellers.
Forward vs. Futures Contracts
In contrast with standard futures contracts, a forward contract can be customized to any commodity, amount, and delivery date, and is generally a private arrangement. This makes forward contracts less readily available to the retail investor than futures contracts. Because forward contracts do not generally trade on public exchanges, they are considered over-the-counter (OTC) instruments.
While futures contracts are standardized, trade on major exchanges, and have clearinghouses that guarantee the timely and complete delivery of the transactions; forward contracts lack a centralized clearinghouse and, therefore, can pose a higher degree of default risk.
Forward contracts settle on one date at the end of the contract, while futures contracts can settle over a range of dates. In addition, a forward contract settlement can occur on a cash or delivery basis.
Related terms:
Asset
An asset is a resource with economic value that an individual or corporation owns or controls with the expectation that it will provide a future benefit. read more
Clearinghouse
A clearinghouse or clearing division is an intermediary that validates and finalizes transactions between buyers and sellers in a financial market. read more
Commodity
A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. read more
Convergence
Convergence is the movement of the price of a futures contract toward the spot price of the underlying cash commodity as the delivery date approaches. read more
Default Risk
Default risk is the event in which companies or individuals will be unable to make the required payments on their debt obligations. read more
Demand
Demand is an economic principle that describes consumer willingness to pay a price for a good or service. read more
Derivative
A derivative is a securitized contract whose value is dependent upon one or more underlying assets. Its price is determined by fluctuations in that asset. read more
Forward Delivery
Forward delivery is the final stage in a forward contract when one party supplies the underlying asset and the other takes possession of the asset. read more
Forwardation
Forwardation is a term used in the pricing of futures contracts and happens when the futures price of a commodity rises higher than the current price. read more
Forward Contract
A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. read more