A. Forward vs. Futures Markets
1. Forward contracting involves a contract initiated at one time and performance in accordance with the terms of the contract occurring at a subsequent time.
- Example: A highly prized St. Bernard has just given birth to a litter of pups. A buyer agrees to buy one pup for $400. The exchange cannot take place for 6 weeks. The buyer and seller agree to exchange (sell) the pup in 6 weeks for $400. This is a forward contract; both parties are obligated to go through with the deal.