Forward contracts

For many years, banks have used forward contracts to hedge a risk or to take a position.

A forward is an agreement between two parties to sell a financial instrument (a share, currency, bond) at a future date (the delivery date) at a predetermined price.

Example

For instance, let us imagine a contract signed in September between e-Bank and Alpha Bank: e-Bank agrees to buy a 3-month-to-maturity treasury bill next December at a price of 90 fixed today.

It is an off-balance sheet transaction as it is just an agreement between two parties. As discussed in Stage 1, it has no impact on assets and liabilities (the very small transaction ...

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