DEFINITION of 'Forward Commitment'

1. A contract pertaining to the future sale or purchase of a security. Price and date are specified in the contract.

2. A formal promise to make a loan sometime in the future. It typically refers to a mortgage-backed security where the funds are usually needed at a later date.

BREAKING DOWN 'Forward Commitment'

1. A formal commitment in the form of a future security sale or purchase allows both parties to omit the risk pertaining to stock price volatility.

2. A formal commitment can provide the borrower with the security of knowing they will have the funds when they need them as well as give the lender the ability to forecast future business.

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