Which term best describes a contract obligating one party to buy and another to sell a specific financial instrument or physical commodity at a specified future date and price?

Which term best describes a contract obligating one party to buy and another to sell a specific financial instrument or physical commodity at a specified future date and price?

• A. Swap contract
• B. Futures contract
• C. Option contract
• D. Forward contract

Answer: (D)

This describes a contract that creates a bilateral obligation to buy or sell a specific asset at a predetermined price on a future date. That is the essence of a forward contract. Forwards are typically privately negotiated and customized to the exact asset, quantity, price, and date, with settlement at maturity. Other instruments differ in key ways: a swap involves exchanging cash flows over time rather than delivering a single asset at a future date; an option gives the right, not the obligation, to buy or sell at a strike price; and a futures contract is standardized and exchange-traded with daily marking to market and margin requirements, not a private, one-shot agreement at a future date.

This describes a contract that creates a bilateral obligation to buy or sell a specific asset at a predetermined price on a future date. That is the essence of a forward contract. Forwards are typically privately negotiated and customized to the exact asset, quantity, price, and date, with settlement at maturity.

Other instruments differ in key ways: a swap involves exchanging cash flows over time rather than delivering a single asset at a future date; an option gives the right, not the obligation, to buy or sell at a strike price; and a futures contract is standardized and exchange-traded with daily marking to market and margin requirements, not a private, one-shot agreement at a future date.