Forward Price

What is a Forward Price

Forward price is the foreordained delivery price for an underlying commodity, currency, or financial asset as chosen by the buyer and the seller of the forward contract, to be paid at a foreordained date from now on. At the commencement of a forward contract, the forward price makes the value of the contract zero, however changes in the price of the underlying will cause the forward to take on a positive or negative value.

The forward not set in stone by the accompanying formula:
$\begin &F_0 = S_0 \times e^ \ \end$

Nuts and bolts of Forward Price

Forward price depends on the current spot price of the underlying asset, plus any carrying costs, for example, interest, storage costs, foregone interest or different costs or opportunity costs.

Albeit the contract has no intrinsic value at the commencement, over the long haul, a contract might gain or lose value. Offsetting positions in a forward contract are equivalent to a zero-sum game. For instance, assuming one investor takes a long position in a pork belly forward agreement and another investor takes the short position, any gains in the long position equals the losses that the subsequent investor causes from the short position. By initially setting the value of the contract to zero, the two players are on equivalent ground at the beginning of the contract.

Forward Price Calculation Example

At the point when the underlying asset in the forward contract doesn't pay any dividends, the forward price can be calculated utilizing the accompanying formula:
$\begin &F = S \times e ^ { (r \times t) } \ &\textbf \ &F = \text{the contract's forward price} \ &S = \text{the underlying asset's current spot price} \ &e = \text \ &\text{by 2.7183} \ &r = \text \ &\text \ &t = \text \ \end$
For instance, assume a security is currently trading at $100 per unit. An investor needs to go into a forward contract that lapses in a single year. The current annual risk-free interest rate is 6%. Utilizing the above formula, the forward price is calculated as:
$\begin &F = $100 \times e ^ { (0.06 \times 1) } = $106.18 \ \end$
Assuming the there are carrying costs, that is added into the formula:
$\begin &F = S \times e ^ { (r + q) \times t } \ \end$
Here, q is the carrying costs.

Assuming the underlying asset pays dividends over the life of the contract, the formula at the forward cost is:
$\begin &F = ( S - D ) \times e ^ { ( r \times t ) } \ \end$
Here, D equals the sum of every dividend's current value, given as:
$\begin D =& \ \text(d(1)) + \text(d(2)) + \cdots + \text(d(x)) \ =& \ d(1) \times e ^ {- ( r \times t(1) ) } + d(2) \times e ^ { - ( r \times t(2) ) } + \cdots + \ \phantom{=}& \ d(x) \times e ^ { - ( r \times t(x) ) } \ \end$
Utilizing the model above, assume that the security pays a 50-penny dividend like clockwork. In the first place, the current value of every dividend is calculated as:
$\begin &\text(d(1)) = $0.5 \times e ^ { - ( 0.06 \times \frac { 3 }{ 12 } ) } = $0.493 \ \end$

$\begin &\text(d(2)) = $0.5 \times e ^ { - ( 0.06 \times \frac { 6 }{ 12 } ) } = $0.485 \ \end$

$\begin &\text(d(3)) = $0.5 \times e ^ { - ( 0.06 \times \frac { 9 }{ 12 } ) } = $0.478 \ \end$

$\begin &\text(d(4)) = $0.5 \times e ^ { - ( 0.06 \times \frac { 12 }{ 12 } ) } = $0.471 \ \end$
The sum of these is $1.927. This amount is then connected to the dividend-adjusted forward price formula:
$\begin &F = ( $100 - $1.927 ) \times e ^ { ( 0.06 \times 1 ) } = $104.14 \ \end$

Features

• It is generally equivalent to the spot price plus associated carrying costs, for example, storage costs, interest rates, and so on.
• Forward price is the price at which a seller conveys an underlying asset, financial derivative, or currency to the buyer of a forward contract at a foreordained date.