Forward derivative contract

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Amit (Querist)

23 September 2014 How the forward contract is derivative contract .As the amount payable or receiable is fixed at pre-determined rate irrespective of change in price of underlying asset..?say A enter into forward contract with B for to buy share of xyz ltd. after 3 month at a price of Rs .50 per share.the mode of settlement is by ways of physical delivery.Is this forward contract treated as derivative contract if yes then why...???

Nikhil Kaushik

Nikhil Kaushik (Expert)

24 September 2014 the price is being determined but the actual contract execution will depend on the share price on that particular day. A will buy only if the price is equal to or above Rs .50 per share...

however, if there is no option of choosing whether to buy on the given date, then it wont amount to derivative contract. Then it would be merely a contract for sale.

Amit

Amit (Querist)

24 September 2014 Yes , in forward contract there is no option as there is obligation to buy share at later date at pre determined price.so here contract value is fixed and take delivery. am i right...?? But is it derivative if the term of settlement of contract is cash settlement ? i.e.,not physical delivery but exchange of difference .

Amit

Amit (Querist)

27 September 2014 Yes , in forward contract there is no option as there is obligation to buy share at later date at pre determined price.so here contract value is fixed and take delivery. am i right...?? But is it derivative if the term of settlement of contract is cash settlement ? i.e.,not physical delivery but exchange of difference .

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