What is Forward Derivative - Students Explore

What is Forward Derivative


Although forward contract, often known as forwards, and futures, do not trade on exchanges. There is no over-the-counter trading for these contracts. The buyer and seller have the option to alter the terms, size, and settlement procedure when creating a forward contract. Forwarded contracts have higher counterparty risk for both parties because they are OTC items.

A type of credit risk, counterparty risks involve the possibility that the parties may be unable to fulfil their contractual obligations. The other party may be left with no options and risk losing the value of its position if one party becomes bankrupt.

Once a forwards contract is established, the parties can offset their positions with additional counterparties, thus increasing the risk of counterparty concerns as more traders become involved in the same contract.

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