Forward contracts are not traded on organized exchanges and are instead privately negotiated, making them unique in terms of customization and counterparty risk.

To understand how forward contracts work, it is important to look at the various factors that concern forwards as securities and their features:

• Agreement: Two parties, a buyer and a seller, enter into a private agreement. They agree on the asset to be exchanged, the quantity, the price, and the future delivery date
• Customization: Forward contracts are highly customizable. The terms can be tailored to the specific needs of the parties, including the asset type, quantity, and delivery date
• No Initial Exchange: Unlike futures contracts, no money or collateral is exchanged at the outset of a forward contract
• Private Agreement: Forward contracts are not traded on organized exchanges, and they are typically negotiated directly between the parties. This results in a higher degree of counterparty risk
• Delivery: On the agreed-upon future date, the buyer is obligated to purchase the asset, and the seller is obligated to deliver it. This physical exchange occurs in most commodity-based forward contracts
• Price Determination: The price of the asset in the forward contract is fixed at the time of agreement. It is based on factors such as current market conditions and supply and demand for the asset
• Settlement: Some forward contracts result in the actual delivery of the asset, while others are cash-settled, where the difference between the contract price and the market price at the time of settlement is paid in cash
• Counterparty Risk: There is counterparty risk in forward contracts, meaning that if one party defaults, the other may incur losses. To mitigate this risk, some contracts are cleared through clearinghouses or are secured with collateral

Let's consider an example of a forward contract trade in the context of a commodity:

A coffee producer and a coffee distributor want to secure a price for the delivery of 10,000 pounds of coffee beans in six months.

The current market price for coffee is $2 per pound, but both parties are concerned about potential price fluctuations.

They decide to enter into a coffee forward contract to mitigate this risk.

In this case, The coffee producer is assured of a selling price of $2.10 per pound, providing price stability and reducing the risk of a significant price decline.

The distributor benefits by locking in a purchase price and avoiding potential price increases over the six-month period.

This forward contract trade enables both parties to manage their price risk and plan their coffee business activities with more certainty.

• Forward contracts are derivatives that allow the exchange of a specific asset at a predetermined future date and for an agreed-upon price point 
• Forwards are not traded on organized exchanges and are typically held privately
• The buyer is obligated to buy the asset at maturity, and the seller is obligated to sell it to them 
• Forwards contracts are not standardized and typically carry counterparty risk 
• Forwards contracts are different from options and futures contracts due to their low standardization and less regulations