A customised, privately negotiated agreement between two parties to buy or sell an asset at a specified price on a future date, unlike standardised exchange-traded futures.
A forward contract is an agreement between two parties to buy or sell an asset at a specified price (the forward price) on a predetermined future date. Unlike Futures contracts which are standardised and traded on exchanges, forwards are customised Over-The-Counter (OTC) agreements tailored to the specific needs of the counterparties.
The key differences between forwards and futures: forwards are customised (any quantity, any expiry date) while futures have fixed lot sizes and expiry dates. Forwards trade OTC (between two parties directly) while futures trade on exchanges (NSE, MCX). Forwards carry counterparty risk (the other party might default) while futures are guaranteed by the clearing corporation. Forwards are settled at maturity while futures are marked-to-market daily.
In India, forward contracts are most commonly used in the currency market. Importers and exporters use USD/INR forwards to hedge exchange rate risk. For example, an IT company expecting to receive $10 million in 3 months can sell USD/INR forward at Rs 84 per dollar, locking in Rs 84 crore regardless of where the rupee goes. If the rupee weakens to Rs 85, they benefit from the hedge. If it strengthens to Rs 83, they miss out on the better rate — but the certainty is the point.
RBI regulates the OTC currency forward market in India. Banks are the primary dealers in currency forwards, offering tenures from 1 month to 12 months (sometimes longer for large corporates). The forward premium or discount reflects the interest rate differential between India and the foreign country — since Indian interest rates are typically higher than US rates, the USD/INR forward rate usually includes a premium (forward price > spot price).
Commodity forward contracts in India are used by producers and consumers to lock in prices. A gold jeweller might enter a forward with a bullion dealer to buy 10 kg of gold at Rs 65,000 per gram in 3 months, eliminating price uncertainty. However, SEBI encourages moving such hedging to exchange-traded platforms (MCX, NCDEX) for transparency and reduced counterparty risk. The non-deliverable forward (NDF) market for INR, primarily offshore in Singapore and London, also influences domestic currency pricing.
India Context
RBI regulates OTC currency forwards. Banks are primary dealers. Forward premium reflects India-US interest rate differential. Offshore NDF market in Singapore/London influences INR pricing.