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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

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

Variables

Spot price at maturity ()
Forward (contract) price ()
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.