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Forward Contracts and the Distinction Between Payment and Delivery

Article Quant Q&A · Author: d.soleimani
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Summary

The document asks which timing feature defines a forward contract: the future delivery of the underlying asset or the timing of payment. It raises the Islamic finance contract Salam, also called Salaf, as a point of comparison. In the description given, Salam resembles a forward because delivery occurs later, while payment is made when the contract is entered into. The text notes that sources differ on whether to classify Salam as a forward, and cites a finance author who describes it as an ancient form of forward contract.

The document poses this as an open definitional question and does not resolve it, provide a formal contract taxonomy, or compare market conventions. Its useful contribution is identifying that payment date and delivery date can be distinct contract terms, and that classification may depend on how “forward” is defined. Readers should treat the example as a prompt for clarifying terminology rather than a settled account of Islamic finance or derivatives practice.

Key ideas

  • Forward contracts raise a definitional question about whether future delivery or deferred payment is the central feature.
  • The document describes Salam as involving payment at contract formation and delivery later.
  • It reports differing views on whether Salam should be classified as a forward contract.
  • The text leaves the classification question open and offers no definitive resolution.

Tags

FuturesDerivatives pricing
Full text
# What is the main point in the Forward contracts definition?


# What is the main point in the Forward contracts definition?












In Islamic Finance there is a contract called "Salaf" or "Salam" which is similar to Forwards except in time of payment which happens in the entering contract day (exactly unlike the Forwards). Some people says It isn't Forward but some other include Salaf in Forwards for instance Muhammad Ayub in "Understanding Islamic Finance":

> Bai‘ Salam is an ancient form of forward contract wherein...

So the Question is which is the main point "Time of Delivery" or "Time of Payment" in Forwards?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.