Firm Commitment Underwriting

A firm commitment has three general meanings in finance, but is most known as an underwriter's agreement to assume all inventory risk and purchase all securities for an initial public offering (IPO) directly from the issuer for sale to the public. It is also known as "firm commitment underwriting" or "bought deal." The term also refers to a lending institution's promise to enter into a loan agreement with a borrower within a certain period. A third application of the firm commitment term is for accounting and reporting of derivatives that are used for hedging purposes. A firm commitment generally refers to an underwriter's agreement to assume all inventory risk and purchase all securities for an IPO directly from issuers for public sale. A firm commitment is used in accounting for derivatives, as defined in the Financial Accounting Standard Board (FASB)