Forward Contracts and OTC Customization
A forward is a privately negotiated agreement to transact later at an agreed price. Everything about it is negotiable, and everything about it is bilateral.
When customisation is worth it
Standardised futures exist in fixed sizes on fixed dates. Real exposures rarely arrive that way.
A company owing ¥137m on 14 March needs exactly that amount on exactly that date. A future gives approximately that amount at the nearest quarterly expiry, leaving residual exposure in both size and timing.
For a corporate treasurer whose objective is certainty in the accounts, that residual defeats the purpose. Paying a slightly worse price for an exact match is straightforwardly worth it.
Forwards also cover exposures with no listed contract at all: a specific grade at a specific location, an emerging market currency, a bespoke basket.
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