Forward Contract Forex Example
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FAQ
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.
The definition of forward is directed toward something in advance, ready or eager. An example of forward is a ball moving in an onward direction. An example of forward is a person who is very willing to offer her opinions and solutions.
For example, a company expecting to receive 20ac20 million in 90 days, can enter into a forward contract to deliver the 20ac20 million and receive equivalent US dollars in 90 days at an exchange rate specified today. This rate is called forward exchange rate.
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.
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.