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LSDefine
Simple English definitions for legal terms
forward contract
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A quick definition of forward contract:
A forward contract is an agreement between two or more parties that creates obligations that can be enforced by law. It is a written document that sets forth the terms of the agreement. A contract can refer to three things: the actions taken by the parties to create new legal relations, the physical document that serves as evidence of the agreement, and the legal relations that result from the agreement. A contract is essentially a promise or set of promises that the law recognizes as a duty. Laypeople and lawyers may also use the term "contract" to refer to the written document, but it is important to understand that the legal concept of a contract refers to the agreement itself, not just the document.
A more thorough explanation:
A forward contract is a type of contract between two or more parties that creates enforceable obligations. It is a written agreement that sets forth the terms and conditions of the contract.
For example, if a farmer wants to sell his crop to a buyer at a future date, they can enter into a forward contract. The contract will specify the price, quantity, and delivery date of the crop. The farmer is obligated to deliver the crop on the specified date, and the buyer is obligated to pay the agreed-upon price.
Another example is a forward contract for currency exchange. If a company knows it will need to exchange a certain amount of currency in the future, it can enter into a forward contract with a bank. The contract will specify the exchange rate and the date of the exchange. The company is obligated to exchange the currency on the specified date, and the bank is obligated to provide the agreed-upon exchange rate.
These examples illustrate how a forward contract creates enforceable obligations between parties. Both parties are bound by the terms of the contract and must fulfill their obligations on the specified date.