What Is a Forward Delivery?

A forward delivery is a term used to identify the delivery of an asset used in the creation of a forward contract. The activity involves the effort of the seller to deliver that underlying asset to the buyer in a manner that is in compliance with the terms and conditions governing the sale. All the provisions that will govern the forward delivery are covered in the forward contract that is agreed upon by the two parties on the date they choose to do business.

There are several components that will be involved in the execution of the forward delivery. One of the more important aspects of the arrangement is the clear identification of the security that is being sold as part of the arrangement. Typically, a concise description is included in the sales contract, leaving no doubt as to the nature of the asset that is being sold.

In addition to making sure the forward delivery contract includes an exact description of the security in question, the price for the asset is also clearly stated in the terms. This will be the price that both parties agreed to on what is known as the contract date, which is simply the date that everyone involved confirmed the business deal. If there are any ancillary expenses that one or both parties agree to share or to assume individually, those costs are sometimes also included in the terms of the contract.

Another key element in a forward delivery strategy is settling on the dates that the forward contract will be settled and the underlying asset will be delivered to the buyer. Typically, this type of arrangement allows a buyer to secure the asset now at a lower price, in anticipation that the asset will be worth considerably more by the time the payment date arrives. This would position the buyer so that the asset could be sold immediately upon receiving possession, generating a profit immediately. At the same time, the price named in the contract governing the forward delivery is likely to be enough to benefit the seller, and also provides protection from the possibility that the asset will not perform as well as anticipated in the interim.

The exact terms of a forward delivery will depend on what the buyer and seller have determined is an arrangement that both parties feel is equitable. Each of the parties do take on some degree of risk by engaging in this type of contract, since the buyer may end up making less on the deal and may even possibly sustain a loss if the asset is worth less at the time it is surrendered or delivered. The seller also runs the risk of selling the underlying asset for an amount that is much less than what it is ultimately worth, meaning that the profit made from the sale pales in comparison to the money that would have been earned if the asset had been held for a little longer.