A forward contract is a customized, non-standardized agreement between two parties to buy or sell a specific asset at a predetermined price on a specified future date.

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Unlike standardized futures contracts, forward contracts are privately negotiated and traded over-the-counter (OTC), allowing the terms-such as the asset, quantity, price, and settlement date-to be tailored to the needs of the contracting parties.

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Both parties are obligated to fulfill the contract at maturity: the buyer takes a "long" position (obligated to buy), and the seller takes a "short" position (obligated to sell). Forward contracts are commonly used for hedging against price fluctuations in commodities, currencies, or other assets, but they also expose both parties to greater counterparty risk due to the lack of a centralized clearinghouse.

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For example, a corn grower might sign a contract in February to sell 1,000 bushels of corn at $4.26 per bushel for delivery in October, locking in both the price and quantity months before the crop is harvested. This helps the farmer reduce the risk of price fluctuations and ensures a buyer for the crop.

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