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what is the meaning of forwards in finance?

Question:
what is the meaning of forwards in finance?

Answer:
It's a transaction where the delivery of whatever commodity you are trading will be in the future, but at a price determined today. It is often used to hedge against the risk of negative currency fluctuations by companies doing business in foreign countries.

For example, if the yen to dollar exchange rate is 100 yen for 1 dollar (hypothetically), and the exchange rate switches to 80 yen for 1 dollar, a Japanese company who sold a 20,000 car in the US would only get 1,600,000 yen for the car, versus what it would have received originally (2,000,000 yen). Companies can not keep changing prices, and they can not ask for more money once a sale is complete. Thus, the forward contract would insure that the Japanese company received at least a certain amount, say 1,800,000 yen (whatever the forward contract is for). Of course, if the rate becomes 120 yen to 1 dollar, the Japanese company would choose not to exercise the forward contract.

Forward contracts normally cost quite a bit, otherwise the companies offering them would not make any money. In essence, they are acting like insurance companies: you will not always need them, but you still have to pay the premiums if you want them just in case.