What is forward trading?
Forward trading is an alternative to buying and selling at spot price, where an investor will physically purchase and own an asset based on its current spot price, with the intention of selling it later for a higher amount. When evaluating whether to buy an asset at spot price or using a forward contract, traders can use the theory of contango and backwardation to see whether the future delivery price will be lesser or greater than the current spot price. If it is greater, they may opt to use a forward contract.
The cash settlement takes place at the end of a forward contract period, as it has a pre-defined date of expiry. A forward hedging strategy is often used to decrease the risk of losses when price movements are particularly volatile in a financial market, as traders can close out their positions before the delivery date of the underlying asset in return for cash. In particular, this applies to forex hedging, where cross currency swaps use forward contracts to hedge the risk of fluctuating exchange rates between international currencies.