Forward Price

AAA

DEFINITION of 'Forward Price'

The predetermined delivery price for an underlying commodity, currency or financial asset decided upon by the long (the buyer) and the short (the seller) to be paid at predetermined date in the future.

At the inception of a forward contract, the forward price makes the value of the contract zero.

The Forward Price can be determined by the following formula:

Forward Price



where:
S0 represents the current spot price of the asset
F0 represents the forward price of the asset at time T
er represents a mathematical exponential function

INVESTOPEDIA EXPLAINS 'Forward Price'

Taking positions in a forward contract is a zero-sum game. For example, if Joe takes a long position in a pork belly forward agreement and Jane takes a short position in a forward agreement, any gains that Joe makes in the long position equal the losses that Jane incurs from the short position. By initially setting the value of the contract's value to zero, both parties are on equal ground at inception of the contract.

RELATED TERMS
  1. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  2. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  3. Underlying

    1. In derivatives, the security that must be delivered when a ...
  4. Derivative

    A security whose price is dependent upon or derived from one ...
  5. Spreadlock

    An agreement that establishes a predetermined spread for future ...
  6. Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with ...
Related Articles
  1. Getting Started In Foreign Exchange ...
    Forex Education

    Getting Started In Foreign Exchange ...

  2. Futures Fundamentals
    Insurance

    Futures Fundamentals

  3. All About Liquid Commodities
    Options & Futures

    All About Liquid Commodities

  4. An Introduction To Depreciation
    Active Trading

    An Introduction To Depreciation

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center