What is 'Advance Commitment'

An advance commitment is a promise or agreement to take some future action. In finance, it is often related to the buying or selling of an asset at some future time, often with pre-agreed terms.

Futures contracts are a type of advance commitment, except that the buyer or seller of the contract can back out of the contract by taking an offsetting position as long as it is before the expiry date.

Breaking Down 'Advance Commitment'

Advance commitments occur in the financial markets, business, and other areas of life.

In the financial markets, parties may make an advance commitment to buy or sell an asset. This is commonly done with a futures contract. The person buying the contract is agreeing to buy the underlying asset at the agreed price when the contract expires. The seller of the contract is agreeing to provide the underlying asset to the buyer, and in exchange receives the funds from the buyer. Exchange-traded futures contract can be offset prior to expiry. The the buyer and/or seller receives their gain or loss on the contract, but removes their obligation to buy or deliver the underlying asset.

Short selling a stock is also a form of advance commitment. When a trader sells a stock they don't yet own, hoping to buy it back at a lower price, they are creating an obligation to buy back the shares they short sold at a future date. Although, in this case, the price they will buy the shares at, and when, is unknown at the time of the initial short sale.

In banking, a financial institution will make an advance commitment to a borrower to lend funds on a specified date with agreed-upon terms. This is often the case with a mortgage, as the day the loan is granted is different than the day when the funds are sent to the home seller on behalf of the buyer. A home buyer may go through the process of getting the loan approved before they fully commit buying a house. In doing so, they know the bank has made a commitment to fund the purchase even if they don't take possession of the house for several weeks or even months. In mortgage banking, an advance commitment is called a "standby commitment."

In everyday life, getting engaged to be married is an advance commitment, with action of getting married to come at a later date. Offering to borrow a friend money next Friday is also a form of advance commitment. 

  1. Forward Commitment

    A forward commitment is an agreement between two parties to carry ...
  2. Firm Commitment

    A firm commitment is an underwriter's agreement to assume all ...
  3. Capital Commitment

    Capital commitment is future capital expenditures that a company ...
  4. Committed Capital

    Committed capital is a contractual agreement that obligates an ...
  5. Committed Facility

    A committed facility is a credit facility whereby terms and conditions ...
  6. Buyer's Call

    A buyer's call is an agreement whereby a commodity purchase occurs ...
Related Articles
  1. Personal Finance

    How interest works on a credit card cash advance

    Find out how cash advances and regular credit card purchases are treated differently, they may have different effect with regard to your repayment terms, minimum monthly payments, and interest ...
  2. Managing Wealth

    Rent-to-own homes: How the process works

    Here's what to watch for when negotiating a contract for a rent-to-own home – and who is a good candidate for this option.
  3. Investing

    Housing deals that fall through

    Find why buyers back out, and what you can do if you're left holding the bag.
  4. Insights

    Mortgage Fraud: Understanding and Avoiding It

    It's important to know what condition would it classify as mortgage fraud and know about the common schemes and scams you should avoid.
  5. Trading

    Futures Fundamentals

    This tutorial explains what futures contracts are, how they work and why investors use them.
  6. Investing

    Contingency Clauses In Home Purchase Contracts

    Here, we introduce widely used contingency clauses in home purchase contracts and how they can benefit both Buyers and Sellers.
  7. Investing

    Home Sale Contingencies for Buyers and Sellers

    Home sale contingencies protect buyers who want to sell one home before purchasing another.
  8. Insights

    Talk Is Cheap: Campaign Promises And The Economy

    A president's campaign trail promises often come up against economic reality.
  1. What is the difference between CIF and FOB?

    Learn about the differences between FOB and CIF international trade agreements and the advantages and disadvantages for sellers ... Read Answer >>
  2. What are the benefits of an assumable mortgage?

    An assumable mortgage allows the purchaser of a property to assume the mortgage from the property's seller. The benefits ... Read Answer >>
  3. What is the difference between share purchase rights and options?

    Discover the difference between share purchase rights and options, which are essential to understand when deciding to invest ... Read Answer >>
Trading Center