In an ordinary purchase transaction, the thing is paid for and the buyer receives the product directly. However, such business opportunities are not always possible for commodities or agricultural products. Therefore, forward transactions are often concluded in these cases. Today, these can be used by investors both over the counter and on the stock exchange to make profits.
A forward transaction is a trade in securities, commodities, foreign exchange or goods, the purchase contract of which must only be fulfilled at a time in the future. Another term for forward transaction is "time transaction". If only goods are traded via futures contracts, the term "commodity futures" is also used.
The English terms "future" or "forward" are also frequently used. Forward transactions can be carried out both on the stock exchange and over the counter. If two partners find each other outside an exchange, they can theoretically turn any trade into a forward transaction.
The forward transaction differs from a CFD in Exness broker in that the fulfilment of the contract is postponed to the future. In a spot transaction, the goods or securities are paid for immediately upon receipt.
Forward transactions in everyday practice
In everyday practice, forward transactions can be compared to a purchase on account for a product that has yet to be created. One contracting party must deliver the goods in the future, while the buyer must also pay for the product in the future, subject to a certain deadline.
Long tradition as a financial instrument
The origin of forward transactions goes back to Amsterdam in the 16th century. The metropolis developed into a centre for trading in futures contracts. These contracts were important to hedge the purchase of raw materials in overseas territories as well as for tulips.
A first pure futures exchange was created in 1732 in Osaka, Japan. Rice was the main commodity traded. The New York Stock Exchange started trading in coffee futures in 1880, Hamburg followed suit only seven years later. The aim here was to mitigate price risks, especially in coffee trading.
The purpose of futures trading
Basically, three purposes can be linked to forward transactions:
- Hedging: In this case, futures are used to minimise financial risks when buying goods or securities.
- Trading: In this variant, options become a speculative object in which the buyer and seller bet on price differences.
- Arbitrage: If futures are used in this sense, the focus is primarily on exploiting price differences on different markets.
There is no generally binding legal regulation of forward transactions in Europe. Instead, they are mentioned in individual laws such as the Banking Act or the Securities Trading Act. Forward transactions are classified as derivatives.