What is a forward contract?

A forward contract is a binding commitment between two parties to buy and sell an underlying asset at a predetermined future date and at a specified price. This contract is typically used for hedging or speculation purposes in various markets, including commodities, currencies, and financial instruments. The essential characteristic of a forward contract is that it is tailored to meet the specific needs of the parties involved, such as the quantity of the asset and the delivery date, and it is not standardized or traded on an exchange.

The definition accurately reflects the fundamental nature of forward contracts, making it the correct choice. Other options confuse or misrepresent the characteristics of forward contracts. For instance, while a legal agreement to exchange currency at a future date might sound suitable, forward contracts can pertain to various assets, not just currency. Similarly, the mention of a premium in relation to a temporary agreement does not apply to forward contracts, as they typically do not involve an upfront premium like options do. Lastly, forward contracts are not reversible or flexible by nature, making the description of an option contract inaccurate in this context.