Contract

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A contract is a legally binding document between two counterparties. It can be used more loosely to mean the financial instrument itself which the contract specifies. A termsheet is another name for the legal contract, and refers to the actual paper description of the contract. In a financial setting, the contract would, among other things:

  • Identify the identities of the counterparties.
  • Specify the start date, end date and any other dates relevant to the contract.
  • Specify the terms of the contract, namely who pays who, under what conditions payments are made, and when payments are made.
  • Which currencies apply, and which quoted FX rates are used (if any).
  • The quantity or notional amounts involved.
  • Any optionality that exists within the contract.
  • Clearly specify the underlying(s), and which market data source should be used to gather any market prices.
  • Which jurisdiction applies should any disputes arise.

Banks have departments called Confirmations, which check contracts to make sure they are correct, as errors can lead to large financial losses.