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Forwards are contracts between buyers and sellers to exchange a certain commodity, asset or security at a predefined future date in time. The price is settled in advance and each party is legally bound to make the exchange at the agreed-upon future date regardless of what the spot price will be at the time. Forwards are much like futures contracts, however they differ in that forward contracts can be customized whereas futures contracts are standardized. Forwards are used to hedge against future price risk. For instance, forward contracts are employed by farmers in order to lock in a price for crops in advance of being harvested. This allows them to plan further ahead than if they were to leave themselves vulnerable to the whims of commodity prices.
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