Are you thinking of buying or selling assets at some point in the future? One of the main concerns here is the unpredictable nature of price changes. You wouldn’t want to agree to buy assets now, only to find out later down the track that the price increased.
This puts you in a difficult position, and might have you reconsidering your options.
Luckily, there is a solution – Forward Contracts. Let’s quickly go through what these contracts have to offer.
What Is A Forward Contract?
A Forward Contract basically allows you to agree to buy or sell assets at a certain price now, so that you don’t need to stress about any changes in price moving forward.
It’s quite common for things like oil or poultry where unpredictable changes are likely to occur based on a number of factors. So, a Forward Contract is a great way to lock in your price in the early stages.
The contract should typically outline the following matters:
- Quantity of goods
- Time at which the sale will take place
- How disputes will be handled
- Termination of the contract
It can also include other relevant terms depending on your business relationship and the details of your arrangement.
What Is The Difference Between A Forward Contract And A Futures Contract?
When it comes to purchasing or selling assets at a future date, you might also be considering a Futures Contract. This type of contract trades on stock exchanges, but is still another option for selling or purchasing assets in the future. So, what makes it different from a Forward Contract?
The key difference between the two is the payment stage. A Forward Contract is customised to the parties’ arrangement and is only settled at the end of the contract. A Futures Contract, on the other hand, is a standardised contract with strict ongoing due dates for payment (which also carries less risk than a Forward Contract!).
Futures contracts are also more regulated than Forward Contracts (since they are privately negotiated). A Forward Contract is generally easier to manage as it is flexible with its terms. After all, it isn’t a standardised contract so you can tailor the agreement to you and the other party’s needs.
So, if you’re choosing between these two types of contracts, you’ll need to think carefully about your individual circumstances and whether you’re willing to take on a higher level of risk or not.
Let’s say Anita wants to sell 300,000 mangoes in the next 3 months, but is worried that the price will fall in that time. To secure her financial position, she enters into a Forward Contract with her bank to be paid in 3 months’ time.
In the contract, they agree to sell the mangoes for $2.50 each.
Let’s say the price falls to $1.80. Since this is lower than $2.50, the bank will need to pay Anita the difference between the rate in the contract ($2.50) and the current rate. Ultimately, they would pay Anita $210,000.
However, if the price is higher (for example, it goes up to $4.10), Anita would need to pay the bank $480,000. In other words, she would owe them the difference between the current price and the contracted price.
Where Can I Get A Forward Contract?
It’s a good idea to get a lawyer to draft a Forward Contract for you to ensure that the terms are tailored to your requirements or preferences. At Sprintlaw, our lawyers work closely with you to ensure you’re in the best negotiating position.
Our Forward Contract package includes:
- A draft of a Forward Contract in accordance with the requirements of your business
- Phone consultations with a Sprintlaw lawyer
- A complimentary amendment to the final draft we provide you
Need help with a Forward Contract? Get in touch with us, and we can guide you through the process.
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or email@example.com for a free, no-obligations chat.
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