A forward (fwd) is a contract between two parties who agree to complete a predefined transaction at a predetermined time in the future using a price agreed on the current date. This price is equal to the forward rate at the time the contract is entered into. Because the two parties have the obligation (and not the right) to carry out the transaction, a forward contract has no premium.
It is basically a swap with one fixing, where by default the fixing date, the expiry date and the settlement date all are set to the exchange date.
The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position.
Unlike futures, forwards are traded over-the-counter (OTC) and are conducted directly with a counterparty (not through an exchange). This necessarily means that there is a higher element of credit risk involved.
Why enter into a forward?
Forwards can be used to hedge market risk, as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive.
Pricing a forward in SDX Commodities & Energy
When pricing a forward in SDX Commodities & Energy note the following:
By default the forward's fixing date, the expiry date and the settlement date all are set to the exchange date. For a listed asset (i.e., an exchange traded asset), the exchange date used is the expiry date of the asset's exchange traded future.
After you enter a forward, if necessary you can then manually change the following:
Its fixing date. You do this in the Fixing Details window which is accessed by clicking the Fixing Details button.
Its settlement date. You do this in the Delivery field in the Single Option page or the Delivery/Settlement field in the Portfolio page.