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Derivatives

  Derivatives   |   Tutorial
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  • August 4, 2021
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Closing out a Forward Contract

A forward contract is the simplest type of derivatives, as it constitutes a future-delivery sale transacted today. Once the contract has been entered into, the underlying price or rate is fixed for the amount and delivery date. To take delivery under the terms of the forward at maturity, the buyer should provide instructions to the seller at least one or two days prior to maturity.

Closing out a forward contract can be implemented in one of several ways:

  • Proceed with delivery or taking delivery according to the terms and specifications of the contract.
  • Roll the contract forward to a farther future date at current rates.
  • Close out the contract by buying or selling an offsetting contract at prevailing market rates. For example, a long forward contract can be offset with a short forward contract, or vice versa.

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