A forward contract is a contract in which the seller sells a part of his property after a certain period of time in order to receive cash. In fact, the buyer sells the equivalent of the purchased asset in a forward contract, which the parties are required to comply with, and this process is called forward contract. These bonds were produced by the government in order to meet the needs of the Iran Commodity Exchange market and reduce liquidity in the industry. In the continuation of the article team, we intend to define parallel bonds and  what are bonds  , so stay with us.

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What are bonds?

Advance contract

Forward transaction or forward contract is another type of contract where individuals or companies buy the products and goods they need in advance. In general, the nature of the forward contract is such that the owners of the goods sell their assets in cash in a certain period of time in the future. The contract of Salaf Amkordi has the opposite credit; In credit, you take delivery of the goods and after a period of time, you pay the price to the seller. But in the case of Salaf, you pay for the goods first, and after a certain period of time, you receive your goods.

To better understand this, you are the owner of a refrigerator company and you suspect that the price of refrigerator motors will increase in the next few months. Therefore, you pre-purchase the refrigerator motors you need and pay the full cost to the manufacturer of this part. In fact, you have purchased the product you need for the next few months at a lower price, and the seller has received the required cost of producing that product to continue its production.

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promissory notes

Induction Paper contract is a contract that the supplier (seller) makes to close this contract in order to finance and lack of liquidity. In fact, promissory notes are a type of sukuk that is more secure than partnership bonds, which is why promissory notes are mostly used to cover the financial shortfalls of companies and compensate for government budget deficits. According to the laws mentioned in Islam, the use of these papers is not allowed for some goods such as gold and coins as basic assets. For a statistical comparison of gold and bitcoin, do not miss this article.

What are the advantages and disadvantages of bonds?

Advantages

Bonds have advantages for both the buyer and the seller. The buyer enters into this transaction based on the fact that the price of his goods will increase in the future and to earn more profit. The execution of this contract is guaranteed through the regulatory organizations of the stock market. On the other hand, the seller obtains the capital he needs to produce goods and products, and also accelerates the production cycle of a company or factory.

Disadvantages

People who used the forward contract to pre-purchase the goods they need always face the problem of its non-transferability. Buyers should wait until the end of the time mentioned in the contract to receive their goods. This means that the receivers always face the problem of liquidity and cannot react to market fluctuations. In addition, there is no secondary market for the trading of bonds.

What is the standard parallel forward contract?

This contract is designed to solve the problems that occurred in the predecessor contract. The parallel successor contract is the same as the predecessor contract, with the difference that the buyer or seller can transfer the goods to another person or company before the deadline set in the contract. . In this type of parallel forward contract, the problem of lack of secondary market and liquidity has also been solved. The parallel forward contract is one of the tools used in the commodity market.

In the parallel forward contract, the issuer guarantees a certain amount of profit for the investors during a certain period of sale, and as the price of the asset increases, more profit is given to the investor. To solve the risk of market fluctuations, two tools are used in this contract, which we will explain below.

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Secondary purchase option

By using this tool, the seller or the production company grants the buyer the authorization to buy a part of the basic asset based on the price and time specified in the contract.

Secondary sales option

In the section of advance papers, it was said that the buyer will not be allowed to sell until the end of the contract, this problem was solved by using parallel advance orders. Now, the secondary sales option has the same meaning, that is, the buyer will be allowed to sell a certain amount of the purchased asset at the specified time.

What are the advantages of the standard parallel forward contract?

The disadvantages of this contract were pointed out in the section of “What are the promissory notes” and all these problems were solved with the introduction of the standard parallel promissory note contract. Now we are going to talk about the other benefits of the parallel advance contract.

• tax free
• Liquidity is guaranteed due to market rotation
• The duration of the contracts is one to two years
• Risk taking is reduced
• The addition of a secondary market to transactions
• View daily and current prices of goods
• Small transaction fees
• It has a guaranteed minimum profit based on the growth of the product price, which may increase up to the profit limit specified in the contract
• Increasing liquidity
• Reducing transaction costs
• Providing financial support for producers
• The possibility of assigning appointments to other people

How is the preparation of promissory notes?

In order to purchase bonds, applicants should refer to the valid operations of the country’s stock market and obtain the stock exchange code. After receiving the stock exchange code, individuals must announce the purchase request to the relevant offices and register it. To learn more about the stock market, read the article What is the stock market?

What products can be traded in the form of promissory notes?

Two categories of goods can be traded through promissory notes. Goods that can be physically transported, such as: oil and steel ingots, iron ore, hot steel sheets, etc. can be pre-purchased. The next category includes goods for which the government does not set a price and does not have a price limit.

What is a futures contract?

Another type of contract is that the seller is obliged to sell a certain amount of the goods he bought on a certain date mentioned in the contract, and on the other hand, the buyer undertakes to buy that specified amount of the goods. The future contract is such that the buyer buys the item he needs and pays for it when the goods are delivered. The future contract gives the buyer the ability to sell goods that he does not own, and to prevent fraud, a statement or an amount is taken from the buyer to guarantee the contract. Now, for you readers, this question may arise, what is the difference between futures and futures contracts, we will discuss this issue in the next part.

How is the process of doing secondary transactions of parallel bonds?

Until the expiration of the contract, standard parallel bond transactions are carried out on a daily basis. To carry out the process of this transaction, you must first receive the stock exchange code, and then you must go to the brokerage firm where you will sign the contract, because this type of transaction is done in the online trading system. You can also send the necessary documents to the broker to conclude the contract, which we will explain in the following transaction process.

 pre-opening

During this period, customers will have the ability to change, register or delete their orders. Basically, orders are not executed during this period, but the prices suggested by customers are entered by brokers in the trading system.

Single price auction

This stage is such that the orders entered in the transaction system are examined and the price that has the possibility of the largest volume of transactions is found, after which the auction will continue in a completely continuous manner.

Continuous auction

This stage continues from the opening of the system until the end of the trading time, and in this stage, after the entered prices are equalized with each other in the trading system, the transaction is done.

End of trading session

The last moment of one hour is the trading day, after which the calculations used for settlement are done and the final check is placed at the close of the session.

Application of parallel forward contracts

The government can finance by using these agreements, which is as follows; It pre-sells its products and productions by issuing parallel promissory notes and will deliver the products to buyers at the beginning of the contract period. Otherwise, it sells the products in global markets at daily prices and provides them to users in cash. Also, there are many producers who are facing the problem of liquidity, and by means of these contracts, they can pre-sell their products in cash, and by solving this problem, they will continue their production process, and finally, when the time of the contract comes, they will sell the pre-sold products to the buyers. They deliver themselves

What is the difference between contracts and bonds?

It is a contract that the investors of the commodity market, in addition to profiting from the increase in prices, will also profit from the decrease in prices. Therefore, futures contracts are considered a type of bilateral contract. In future contracts, to prevent fraud, an amount is kept at the clearing house to guarantee the contract, and the parties are obliged to reduce the guarantee amount in case of price fluctuations.

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Conclusion

As we said before about what are bonds. Promissory notes are one of the tools of the commodity exchange market, which are used for the lack of liquidity and to provide capital for the production of goods for the producer. Applicants of promissory notes take steps directly to solve the lack of liquidity in the market, improve the level of national production and grow the country’s economy. Using promissory notes, individuals and producers can buy or pre-sell a product that has not yet been produced, or sell it to another person before production.