A rental agreement reduces future market risk to both parties guaranteeing a fixed price for a fixed space. This is what a forward contract achieves.
The table below illustrates forward contract using rental lease as an example:
Thursday, January 19, 2017
Understanding Forward Contracts - using rental lease as a use case
A very good example of a forward contract is a rental lease agreement. Think it this way, a tenant's lease is simply a portfolio of Forward contracts. Remember a forward contract is a specific contract between two parties to exchange goods(services) at a specified price on a future date (think swap agreement). In case of a lease, the exchange is use of space for a specific period of time in exchange for periodic payments.
A rental agreement reduces future market risk to both parties guaranteeing a fixed price for a fixed space. This is what a forward contract achieves.
The table below illustrates forward contract using rental lease as an example:
A rental agreement reduces future market risk to both parties guaranteeing a fixed price for a fixed space. This is what a forward contract achieves.
The table below illustrates forward contract using rental lease as an example:
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