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In a forward contract, the buyer and seller agree to buy or sell an underlying asset at a price they both agree on at an established future date. This price is called the forward price. This price is calculated using the spot price and the risk-free rate. The former refers to an asset's current market price.
Forward contracts can involve the exchange of foreign currency and other goods, not just commodities. For example, if oil is trading at $50 a barrel, the company might sign a forward contract with its supplier to buy 10,000 barrels of oil at $55 each every month for the next year.
A forward contract settlement can occur on a cash or delivery basis. Forward contracts do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments.
In a forward purchase agreement, the parties enter into a contract to buy or sell an asset at an agreed upon price at a future date or upon the occurrence of a specified future event. These agreements have become a popular strategy as SPACs search for new options and deal terms to attract potential targets.
A forward contract allows you to buy or sell an asset on a specified future date. To account for one, start by crediting the Asset Obligation for the current value of the good on the liability side of the equation. Then, on the asset side, debit the Asset Receivable for the forward rate, or future value of the good.