Cima F2 Exam Question No 35

Question No 35:

What is forward contracts?

The holder of a forward contract is obliged to buy or sell a defined amount of a specific underlying asset, at a specified price at a specified future date. For example, a forward contract for foreign currency might require £100,000 to be exchanged for $150,000 in three months' time. Both parties to the contract have both a financial asset and a financial liability. For example, one party has the right to receive $150,000 and the obligation to pay £100,000.

Forward currency contracts may be used to minimise the risk on amounts receivable or payable in foreign currencies