Forward contracts are cash market transactions between a seller and a buyer. The seller and buyer can sometimes be a bank and another bank (Shapiro 174). Specifically, a forward contract is a private agreement between the seller and buyer, in which the seller agrees to sell a certain commodity or asset for a set price that the buyer agrees to pay on a specified future date (Financial Web). The commodity is also known as the underlying instrument (Financial Web). The delivery of the commodity occurs in the future, but the price is set upfront and remains the same. The spot price, or market price of the commodity at the time of making the contract, is what determines the price (Business Dictionary). A forward contract is considered private because it not standardized or traded through exchanges (Investopia). Also, with a forward contract, the buyer and seller must bear each other’s credit risk, which is not the case with futures contracts (Investor Words). An example of a buyer and seller who would use a forward contract would be a potato farmer and a chip company like Frito Lay. The farmer would execute a forward contract with Frito Lay, before harvesting the potatoes, for the delivery and purchase of a certain amount of potatoes at a certain price per pound (Financial Web). The exchange of potatoes for money will occur at a specified future date when the potatoes will be ready, but the price that was set at the time of the contract will not change. By entering into the forward contract, both parties can mitigate some risk. By pre-selling the potatoes at a the set price, the farmer is protected against the risk that the spot price of potatoes will be lower than the price decided on in the contract. Conversely, Frito Lay has protected itself from the possibility of the price of potatoes being higher at the time of delivery (Financial Web). Essentially, the forward contract is designed to protect both the seller and the buyer from a change in price that would negatively affect them. When dealing with forward contracts, it is important for the parties involved to clearly define the terms of the contract in the beginning. Some things to clarity would be location of delivery, quantity and price of the underlying instrument, and payment terms (Financial Web).   Reference: “Forward Contract”. Business Dictionary. 2009. 5 May 2009. <http://www.businessdictionary.com/definition/forward-contract.html>. “Forward Contract”. Investopia. 2009 6 May 2009. <http://www.investopedia.com/terms/f/forwardcontract.asp>. “Forward Contract”. Investor Words. 2009. 6 May 2009. <http://www.investorwords.com/2060/forward_contract.html>. “Forward and Futures Contracts”. Financial Web. 2009. 5 May 2009. <http:/www.finweb.com/investing/forward-and-futures-contracts.html>. Shapiro, Alan C. and Atulya Sarin. Foundations of Multinational Financial Management. Custom Edition for California State University Fullerton. John Wiley & Sons, Inc. 2009.