A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. It can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging.

Unlike standard futures contracts, a forward contract can be customized to a commodity, amount and delivery date. Commodities traded can be grains, precious metals, natural gas, oil, or even poultry. A forward contract settlement can occur on a cash or delivery basis.

Forward contracts do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments. While their OTC nature makes it easier to customize terms, the lack of a centralized clearinghouse also gives rise to a higher degree of default risk. 

Example– You are a farmer and you want to sell wheat at the current rate of Rs.18, but you know that wheat prices will fall in the coming months ahead. In this case, you enter a contract with a grocery for selling them a particular amount of wheat at Rs.18 in three months. Now, if the price of wheat falls to Rs.16, then you are protected. But if the price of wheat rises, then you will get the price as mentioned in the contract.