A commodity derivative that constitutes a forward contract in which a commodity is used as underlying. It is a contractual agreement to deliver a certain quantity and quality of the commodity at a designated time and price. Contrary to commodity futures, these forward contracts are not traded on organized exchanges, but rather over the counter (OTC). Under this set-up, the parties can freely negotiate and determine the terms and conditions of the contract without reference to an exchange.

The seller is the party who/ which agrees and stands ready to deliver the underlying commodity as per the conditions set out in the contract. The buyer, in return, agrees and stands ready to take delivery of the underlying commodity at the expiration date of the contract.