Forward Price

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.


Filed Under: ,

comments powered by Disqus
Hot Definitions
  1. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  2. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  3. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  4. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
  5. Retail Sales

    An aggregated measure of the sales of retail goods over a stated time period, typically based on a data sampling that is extrapolated to model an entire country. In the U.S., the retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce.
  6. Okun's Law

    The relationship between an economy's unemployment rate and its gross national product (GNP). Twentieth-century economist Arthur Okun developed this idea, which states that when unemployment falls by 1%, GNP rises by 3%. However, the law only holds true for the U.S.
Trading Center