What is a forward contract? A forward contract is an agreement between two parties to buy or sell an asset on a specific future date at a predetermined price.
What are the key features of a forward contract? Key features include: it's a bilateral contract, all terms are fixed when entering the contract, and it's an over-the-counter (OTC) transaction.
What is the main purpose of entering a forward contract? The main purpose is to fix the price and avoid price risk.
What are the major limitations of forward contracts? The major limitations are liquidity risk and counterparty risk.
What is liquidity risk in forward contracts? Liquidity risk refers to the difficulty in exiting the contract before maturity due to its tailor-made nature and lack of exchange trading.
What is counterparty risk in forward contracts? Counterparty risk is the risk of economic loss if the other party fails to fulfill their contractual obligation.
What is a futures contract? A futures contract is an agreement made through an organized exchange to buy or sell a fixed amount of an asset on a future date at an agreed price.
How do futures contracts differ from forward contracts? Futures contracts are standardized,