Forward contract

A forward contract is a private, customised agreement between two parties to buy or sell an asset at a fixed price on a specified future date, settled directly between them rather than on an exchange.

ByHoang TruongUpdated July 11, 2026

See it move

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A firm agrees today to buy $10,000 in 90 days at a forward rate of €0.92 per dollar, paying €9,200 regardless of the spot rate at maturity. If the spot rate turns out to be €0.95, buying on the open market would have cost €9,500 — the forward saves the firm €300.

Where it fits

TopicRisk, Return & the CAPMCoreSubjectCorporate FinanceCore

The formula

LaTeX

\text{Payoff}_{long} = (S_T - K) \times Q

Variables

$S_{T}$: Spot price at maturity (€)
$K$: Forward (contract) price (€)
$Q$: Quantity under contract (units)

The gain or loss to the party who agreed to buy, measured against simply transacting at the spot price when the contract matures.

Check yourself

PracticeCORE

A firm enters a forward contract to sell 5,000 barrels of oil in six months at a forward price of €72 per barrel. At maturity, the spot price is €65 per barrel. What is the payoff to the firm, the seller (short position)?

Select an answer to check your understanding.