What is Forward Market?
- 23rd July 2025
- 11:15:00 AM
- 7 min read
Are you concerned that fluctuating prices might affect your future earnings? You can avoid this uncertainty by locking in the price of something you plan to buy or sell months in advance. This is where the forward market comes into play, offering a way to protect yourself from market volatility.
For instance, it is an important concept as more than 24% are active in the derivatives segment compared to two years ago.
This blog provides an in-depth knowledge of what is forward market and how it works with an example.
What Does Forward Trading Mean?
The forward market is a financial marketplace where the prices of various instruments, such as bonds, swaps, equities, futures, and bills of exchange, are determined in advance for future delivery. While it is often associated with the foreign exchange market, it also extends to interest rates, commodities, and securities.
Once the price is set, these assets are traded under agreed terms. However, the parties involved can negotiate changes to the contract’s execution, such as the delivery time, transaction amount, or rate.
Unlike futures and options markets, where participants can exit positions before expiry, forward contracts require both parties to deliver the underlying asset as agreed at maturity.
What is the Working Mechanism of Forward Markets?
Now that you are aware of the forward market meaning, let us understand how it works. The forward market offers both forward and futures transactions. While futures contracts are more consistent and regular in terms of order size and maturity, forward contracts can be tailored to the holder’s needs.
If the market price of their products moves against them, hedgers use the forward market to guard against losses. However, speculators are more interested in making money by speculating on the direction of price than they are in actually acquiring a commodity or currency. Generally, hedgers employ forward contracts more often than speculators.
With the help of the following example, you can have a clear understanding of a forward market.
Example of a Forward Contract
Consider a farmer who intends to harvest 10 kg of corn the next year. He is aware that to turn a profit, he must sell the corn for INR 250 per kg. Right now, he has two options:
- Lock in the rates for the future
- Do nothing and hope that his goods will sell for INR 250
To do this, he can sign a forward contract with the owner of a corn mill to sell corn for INR 250 per kg after harvest. Thereby, he has safeguarded himself against the possibility of a drop in corn prices.
Similarly, the corn mill owner may also enter into the contract to lock in the price and avoid paying more if corn prices rise post-harvest.
4 Types of Forward Market
Here are some of the different types of forward markets in India that have different functions:
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Forward Exchange Market
This type of forward market deals with forward contracts in currency derivatives. Indian importers and exporters frequently utilise the forward forex market as a hedge against unfavourable fluctuations in exchange rates.
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Commodity Forward Market
This forward market consists of tailored contracts for the delivery of tangible goods in future. These include metals, energy products, or agricultural products like grains and spices. Farmers, miners, manufacturers and processors frequently utilise these contracts to control supply chain risks and lock in pricing.
-
Stock Forward Market
This market trades stock index futures and options that are available on markets like the National Stock Exchange and the Bombay Stock Exchange.
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Bullion Forward Market
The bullion forward market offers a platform for trading precious metals and focuses on contracts for the future delivery of gold and silver.
4 Benefits of the Forward Market
Here are the four benefits of the forward market:
- Forward market allows you to customise the contract to meet your unique requirements about quality, delivery date, and location of assets.
- It offers private contracts which are not disclosed like exchange trades.
- Forward trading can protect certain future risks from fluctuations in prices or interest rates.
- The parties can match their exposure to the time frame for entering into a contract. They may modify it to fit any party and adjust the timing accordingly.
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Difference Between Forward Market and Futures Market
Some of the beginners misunderstand the concept of the forward market and often consider it similar to the futures market. The table below highlights the differences between a forward and a futures market:
| Parameters | Forward Market | Futures Market |
| Regulation | Self-regulated. | Regulated by the Securities and Exchange Board of India (SEBI). |
| Standardisation | Contracts in a forward market are not standardised. They are customised according to requirements. | Contracts in the futures market are standardised on predetermined sizes and lots. |
| Risks | The primary risk in a forward market is that participants do not need to make a margin deposit. Additionally, no exchange can regulate transactions. | The primary risk of this market is comparatively less because exchange regulations and margin amounts minimise it. |
| Suitability | The forward market is suitable for specific needs. | The futures market is suitable for hedging and trading. |
| Settlement by Delivery | In this market, the settlement by delivery is over 90%. | The settlement by delivery in a futures market is lower than 2% of the transactions. |
| Transparency | Less transparent as prices are not revealed in public. | Highly transparent, as prices are public. |
Final Thoughts
The forward market protects businesses and individuals against price volatility. Forward forex market, commodity forward market, and bond forward market are some of the several types of forward markets. Although forward contracts are risky, they are private and handy.
If you need any assistance or knowledge regarding forward market or derivative trading, you can use the PL Capital application. The Algo trading platform of PL Capital allows you to diversify your portfolio and manage your risks.
Frequently Asked Questions
1. Who makes forward agreements?
A forward contract is a special arrangement between two parties to buy or sell assets at a specific price and on a future date.
2. What is cash vs the forward market?
The main difference between a cash market and a forward market is the transaction. Transactions in the cash market are completed instantly. The seller receives money as soon as a buyer purchases the item. The forward market, on the other hand, consists of contracts to purchase or sell an asset at a fixed price at a later time.
3. What is a forward market commission?
The Indian commodity and futures market was formally regulated by the Forward Markets Commission (FMC). It regulated trade, encouraged fair play, advised the government, and supervised transactions
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
