A forward contract is best described as

A forward contract is best described as

• A. A standardized contract traded on an exchange with daily settlement
• B. A contract to buy or sell at a set price on a future date, not standardized
• C. It grants the holder the right to buy at a set price
• D. A loan agreement with fixed interest

Answer: (B)

A forward contract is a private, customizable agreement to buy or sell an asset at a specified price on a future date. Terms can be tailored (quantity, quality, delivery date, location), and it’s typically traded over-the-counter, not on an exchange. The price fixed now, to be paid at maturity, is the forward price. This contrasts with futures, which are standardized and traded on an exchange with daily settlement, reducing some risk but offering less customization. The other descriptions refer to different instruments: a standard exchange-traded contract with daily settlement is a future; a contract granting the right to buy at a set price is an option; a loan with fixed interest is a debt instrument.

A forward contract is a private, customizable agreement to buy or sell an asset at a specified price on a future date. Terms can be tailored (quantity, quality, delivery date, location), and it’s typically traded over-the-counter, not on an exchange. The price fixed now, to be paid at maturity, is the forward price. This contrasts with futures, which are standardized and traded on an exchange with daily settlement, reducing some risk but offering less customization. The other descriptions refer to different instruments: a standard exchange-traded contract with daily settlement is a future; a contract granting the right to buy at a set price is an option; a loan with fixed interest is a debt instrument.