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Forward contract introduction | Finance & Capital Markets | Khan Academy

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Forward Contract Introduction. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/forward-futures-contracts/v/futures-introduction?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/put-call-options/v/option-expiration-and-price?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: In many commodities markets, it is very helpful for buyers or sellers to lock-in future prices. This is what both forwards and futures allow for. This tutorial explains how they work and what the difference is between the two. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy
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Text Comments (62)
Sree S (9 months ago)
What if everyone agrees for a future contract? Then it will be the fair market value?
Yao Yao (10 months ago)
a good explanation along with the nice diagram.
Jiayi Wang (10 months ago)
Amazing explanation! Thank you
Dan Tetreault (10 months ago)
What is the difference between forward vs future contract? Same thing?
San Fran (1 month ago)
+Siddu Kolli exactly
Siddu Kolli (5 months ago)
To my understanding, a futures contract is traded on a regulated exchange, while a forwards contract is usually between two private companies. Also, futures are standardized to a contract size, so they can be more easily traded.
qwertyuiop123456789 (1 year ago)
Apple farmer looks like he's about to harvest your soul
squidward (1 year ago)
i’m being very serious right now, can we have drawing tutorials?
Joseph Glover (1 year ago)
That pie farmer is a smart one.
Ritesh Patil (1 year ago)
Really? Is the farmer obligated to sell his apples even though the contract does not say he must sell it to the chain? I mean, if prices have risen then naturally he can sell it to someone else at the higher market price. Genuine doubt.
Bahar Syah (1 year ago)
For some reasons, someone who made forward contract would not put the all quantity into the contract but just half of all quantity so the other half could be sold to other buyers with higher price if the price goes up.
George Reyes (1 year ago)
In this example, its main purpose is to eliminate the risk of the price being unnatractive for both parties. They are basically protecting themselves against the every day volatility.
Benjamin Aw (1 year ago)
thats an option. not a forward contract
Sideshow Bob (2 years ago)
Sal you're just covering a high level summary, but really the mechanics of a forward contract you've overlooked completely. Waste of time videos
Brendan (2 years ago)
so how does an investor play into this? (someone who trades futures)
Captain Blaze (2 years ago)
can you use metric system please?
v kim (2 years ago)
some help here please!! what happens if a purchase of forward contract and a discount was given on the forward rate?? should i add the discount or minus the discount on the spot rate and why??
Alonso Gadea (3 years ago)
im here because my professor failed to explain this in the classroom. SMH.
MrLamine48 (3 years ago)
thanks à lot guys, ive learnt so much with you.
Ozod Khonberdiyev (3 years ago)
Is this really correct? If so, what is the difference between "Futures" and "Forward" contracts?
Mihailo Polenak (3 years ago)
+Tyler Gage pretty correct. It's simple: Futures are exchange traded - backed by a clearinghouse, while Forwards are "over-the-counter" custom contracts between two parties, not traded on an exchange. Futures are pretty much free of counterparty risk being on an exchange, while fwd contracts are not regulated.
Monserrat Sosa (3 years ago)
very well explained
Tabish Khan (3 years ago)
Everything in this video is perfect :) Thank you for the explanation :)
onfire4000 (3 years ago)
Your drawings are pretty. Just thought you should know that. Also, thank you for the explanation.
This is just superb, I've been looking for "trade mispricing transfer pricing" for a while now, and I think this has helped. Have you ever come across - Genubrey Mispriced Infiltration - (Have a quick look on google cant remember the place now ) ? Ive heard some interesting things about it and my friend got excellent success with it.
Ahmed B (3 years ago)
I really liked the example
Joryrox (4 years ago)
Claaaaasy class ! Fun to watch I love the why you breaks these stuff in a very unique interesting way .. Bravoooo
Enki Denys (4 years ago)
So essentially the forward contract is just a delayed purchase/sell agreement.
Alejandro (3 years ago)
+onfire4000 It is not mine either bro! ;)
onfire4000 (3 years ago)
+16542791 There you go. English is not my first language.
Alejandro (3 years ago)
+onfire4000 Purchase*
onfire4000 (3 years ago)
+Enki Denys I believe so, one that takes out the volatility of a periodic normal purchase\sell.
Alejandro (4 years ago)
You are such a genius! xD
machstar12 (4 years ago)
looks like a strip club
hate.cliches yep (5 years ago)
question. so if the pie chain and farmer agree to a certain price, shouldn't that be the market price? why is there a price discrepancy between the supply and demand when they agree at a specified date? why the disequilibrium?
Hamza Lasri (4 years ago)
Because the market is much, much more bigger than one farmer and one pie chain. The price is determined by the aggregate supply and aggregate demand of one good :)
djilijaa (6 years ago)
@wyzhdcp I've got it sorted now, averaging 400-500 pips a week easily. Finding the right trading system is key. I've tried them all, narrowed it down to one extremely powerful technique. Check out the video here --> bit.ly/LFsR1v?=ffzddp
Joy A (6 years ago)
This explanation of a "Forward Contract" was so comprehensive and compact that my 7 year old can NOW explain it to someone else!
Mohammed Kayal (7 years ago)
this 3 minutes video managed to explain what a professor at the university of Manchester couldn't do in two two-hours lectures.
Wouter Van Goey (7 years ago)
@WhatCnaThisBe wacom tablet I guess
Bruman (7 years ago)
Got confused when you stated saying pies per pound instead of apples per pound ha
WhatCnaThisBe (7 years ago)
sir...did you draw that with your mouse??!
Wo0K (7 years ago)
@JaoquinQ he has a MBA from harvard university, the best university in the world, he does not need to research cause he IS the source of information.
Wo0K (7 years ago)
@OsloBobby and also a mathematician, physicist, engineer, buisness man hedgefund analyst...... the list goes on
Rawrlor (7 years ago)
@Entelex Who is the speculator in this forward contract? The producer or the chain?
William Merritt (7 years ago)
This dude can draw...!
Entelex (7 years ago)
A simple yet elegant, precise and understandable treatise on forward contracts which are the basis of futures commodity contracts and why the maligned "speculators" actually provide an extremely valuable service to producers and consumers.
Allen Deng (7 years ago)
@randomwindowsstuffz Yeah, I already knew before you replied. I was at a hobby store and people have been compensating for shipping.
EasternMerchant (7 years ago)
it seems the Techies such as Khan, that can relate to humans are the ones that become the most popular and go the farthest in this world....
ektrules (7 years ago)
So... Forward contracts were invented to protect against volatility. But, all traded commodity futures are extremely volatile. Irony?
Allen Deng (7 years ago)
20 cents a pound? Gee Raplhs market ripped me off...
TurtleTrader (7 years ago)
Dude, YOU ROCK ... you really do!!!
anon anon (7 years ago)
haha Compare this to his 1+1 video. I've got a feeling his drawing ability has increased.
JustDancinThruLife (7 years ago)
I'm sorry, are you just good at everything?
Jason Quinn (7 years ago)
What kind of research do you do for all of these videos?
X (7 years ago)
@ilikechess1 he is a mafia leader in disguise.
Jeel Shah (7 years ago)
damn man, the farmer looks like a boss.
luckydogvegas (7 years ago)
Nice video, you are providing a wonderful service to people all over the world! Keep up the good work.
farhan (7 years ago)
great way to explain a thing ! nice drawing :)
SayianZZ (7 years ago)
I like the drawing :) more visuals yay :P
Evangelia Nicolaidou (7 years ago)
loved the drawings! :D
Petter Schjoldager (7 years ago)
You sir...are an artist

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