What Is a Forward Sale?

Malcolm Tatum

A forward sale is a type of financial transaction that allows a buyer to purchase specific assets with the promise of receiving the delivery of those assets at a specific time in the future. The same general approach can also be used to create a purchase that allows an investor to receive a steady flow of revenue from debt instruments held by a lender in exchange for purchasing rights to those income flows. With any forward sale approach, the general idea is to make it possible to hedge interest rates or minimize the exchange rate risk associated with the assets.

Man climbing a rope
Man climbing a rope

There are several characteristics that identify a forward sale. One is that the seller of the assets will set the price at a level that is slightly below the anticipated return. For example, if the asset in question is a loan, the seller may offer a buyer the right to buy the future payments on the loan at a price that is slightly less than the amount of the actual payments. This makes it possible for the seller to receive a lump sum up front and to provide the buyer with a series of payments that are easily covered by the revenue flow from the loan. Doing so allows the seller to make use of a majority of the outstanding balance on the loan now rather than making use of it incrementally as the payments are tendered.

The concept of the forward sale is also often employed when it comes to the purchase of commodities. In this scenario, an investor buys the commodities with the guarantee that they will be delivered at a specified date in the future, and at a specific price. For the seller, this approach makes it possible to make at least a minimum return from the commodities, no matter what the current market price may be at the time of delivery. The buyer stands to benefit from the forward sale if there is ample reason to believe that the commodities will be worth more than the purchase price at the time they are delivered. This places the buyer in a position of being able to resell the commodities at a profit once he or she has possession.

With just about any forward sale strategy, both parties benefit from the arrangement. Sellers can enjoy receiving a price that is considered equitable, without having to worry about what will happen with the asset in the future. Buyers can often lock in competitive pricing that makes it easier to earn some profit off the transaction once the delivery date has passed. As a result, the forward sale approach remains a viable investment alternative that can under the right circumstances generate a considerable amount of returns for the buyer while also allowing the seller to make some money off the deal.

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