When it comes to legal agreements, forward agreements may not be at the forefront of contracts that come to mind. However, they can be essential in certain industries and transactions. In this article, we will explore forward agreement examples and their importance.
What is a forward agreement?
A forward agreement is a contract between two parties to buy or sell a specific asset at a future date and a pre-determined price. This type of agreement is frequently used in the commodities market, where parties agree to a future price for a specific commodity like oil, corn, or gold, which allows both parties to hedge their risks.
Forward agreements can also be used in real estate transactions. In real estate, a forward agreement is when a buyer and seller agree to a price for a property to be sold at a specific time in the future, allowing the buyer to plan financing and the seller to lock in a sale price, even if the property has not yet been built or finished.
Now, let`s dive into some specific forward agreement examples:
1. Grain contracts in agriculture
Farmers and producers in the agricultural industry often use forward agreements to guarantee a price for their crops. For example, a farmer may agree to sell their entire corn crop to a buyer at a set price, even before the crops are harvested.
This type of agreement protects both parties from price fluctuations in the market. The farmer is guaranteed their price before the crop is harvested, and the buyer has secured a supply of corn at a fixed price.
2. Forward contracts in currency markets
Forward contracts in currency markets are agreements to buy or sell a foreign currency at a specific date in the future at a predetermined price. This type of agreement is commonly used by international companies to protect themselves from currency fluctuations.
For example, a US company that exports goods to Europe may agree to sell their products in euros, and to receive payment in euros. However, the company may be concerned that the euro will decline in value, and they will receive less money for their products. To avoid this risk, the company can enter into a forward agreement to sell euros at a fixed price in the future.
3. Real estate forward contracts
Real estate forward contracts are agreements to buy or sell a property at a predetermined price at a future date. This type of agreement is used when a property is under construction or not yet on the market, and the buyer wants to secure a purchase price in advance.
For example, a developer may agree to sell a building to a buyer at a pre-agreed price, even before the building is finished. This allows the buyer to secure a price for the property and plan financing, while the developer is guaranteed a sale and can plan construction costs.
In conclusion, forward agreements may not be as widely known as other legal agreements, but they are crucial in many industries. The examples we have explored show how forward agreements can protect parties from market risks, provide security, and guarantee prices in the future. Whether you are in the commodities market, currency markets, or real estate industry, forward agreements can be essential tools for risk management and planning.
Başa dön