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How are forward contracts used as part of a hedging program?

How are forward contracts used as part of a hedging program?

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Answer #1

Hedging is a process of minimizing the future expected risk by using certain tool like, forward or future contract. Forwards contracts is a type of financial contract between two parties in which one party agree to buy or sell the commodity at a specific price and at a specific future date and the other party agree to make sell or purchase physical delivery does occur.

Forward contract is use for hedging the risk. if an investor or comapny expect the increase or decrease or price in future then accordingly make a contract with Buyer / Seller to buy or sell at certain specified price. So, by making contract the investor has lock the future price from increase or decrease.

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