A forward contract or ‘forward’ is an agreement between two parties, wherein one will sell an asset to the other on a certain future date at an agreed price. The quantity and quality specifications of the asset and place of delivery are mutually decided while entering into the agreement.

Essentially, the agreement takes place after a one-to-one negotiation between the buyer and the seller and hence, forward contracts offer a lot of flexibility in terms of duration of the contract, quality and quantity of assets and so on.

Illustration
Suppose you plan to sell your house to a friend for Rs 50 lakh one year down the line for which you enter into a contract today. In this case the asset sold is unique, the price is fixed and so is the date of delivery. This amounts to a forward contract.

 
As Forward contracts are negotiated on a one-to-one basis, they offer a high degree of flexibility in terms of price, quantity and delivery time. However their drawbacks are poor liquidity (as they are customised/unique to the two parties in the contract, they cannot be traded with any other party) and default risk (either of the parties could fail to fulfil their obligations).

In India, forward contracts are regularly used in the foreign exchange markets to hedge currency risk and in the commodities market to hedge price risk.