forward contract

 A forward contract—or forward—is an OTC derivative. In its simplest form, it is a trade that is agreed to at one point in time but will take place at some later time. For example, two parties might agree today to exchange 500,000 barrels of crude oil for USD 42.08 a barrel three months from today.

A forward contract is specified with four variables:

the underlier,

the notional amount n,

the delivery price k, and

the settlement date on which the underlier and payment will be exchanged.

 

In Above example, oil is the underlier. The notional amount is 500,000 barrels. The delivery price is USD 42 per barrel. The settlement date is the actual date three months from now when the oil will be delivered in exchange for a total payment of USD 21.04MM.

The party who receives the underlier is said to be long the forward. The other party is short.