What does Forward Commitment mean?
A commitment to sale or purchase of a security at a specified price, with delivery and payment at a specified future date. It is an agreement for trade of a security or a commodity on a future date, the price of which is pre decided.
Such type of a commitment protects the buyer as well as the seller from the risk of correction in prices. Such type of an arrangement helps both the producer as well as the consumer. It ensures that producer has market for the commodity and the user protects himself against future price rise.
Futures Knowledge Explains Forward Commitment
It is also used by businesses to secure a commitment for a loan that they may need in the future. Forward commitments are used to minimize the risk change in interest rates. For example, a builder may enter into a forward commitment with a bank for a loan required for a particular purpose at a future date where the rate of interest is decided now.