The limitations/disadvantages of forward contracts are as follows:
- The user may not be able to negotiate good terms; the price may depend upon the size of the deal and how the user is rated.
- Users have to bear the spread of the contract between the buying and selling price.
- Deals can only be reversed by going back to the original party and offsetting the original trade.
- The creditworthiness of the other party may be a problem.
- A forward contract cannot be canceled without the agreement of both counterparties.
- A forward contract requires tying up capital. There are no intermediate cash flows before settlement.
- Forward contracts are subject to default risk. There are cases in which suppliers intentionally breach the contract if they will incur a significant loss for implementing the contracts.