Forward
A privately negotiated contract to buy or sell an asset at a fixed price on a future date.
On the exam, the forward-vs-futures fork is the highest-yield pattern: a vignette describes a contract and asks which features apply. The “tell” is words like customized, OTC, single settlement at expiration, or counterparty credit risk — all point to a forward, whereas standardized, exchange-traded, daily mark-to-market, or margin call signal a future. A classic trap is the forward price vs. forward value distinction: the locked-in forward price is set at initiation and never changes, while the contract’s value drifts from zero as the spot price moves and is realized only at expiry. Don’t confuse the two — questions deliberately swap the labels.
A second trap pairs forward with notional: the notional sizes the contract’s payoff but is never the amount at risk, so a forward on a large notional can carry tiny mark-to-market value. Memory hook: a forward is a handshake (private, tailor-made, trust-based), a future is a turnstile (standardized, cleared, settled every day).
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