## What is a 'Forward Price'

A forward price is 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 at that time, zero.

The Forward Price can be determined by the following formula:

Next Up

## BREAKING DOWN 'Forward Price'

The forward price of the contract is mainly based on the current spot price of the underlying asset. Although the contract has no intrinsic value at the inception, over time, a contract may gain or lose value. Offsetting positions in a forward contract are equivalent to a zero-sum game. For example, if one investor takes a long position in a pork belly forward agreement and another investor takes a short position in a forward agreement, any gains in the long position equals the losses that the second investor incurs from the short position. By initially setting the value of the contract's value to zero, both parties are on equal ground at the inception of the contract.

## Forward Price Calculation Example

When the underlying asset in the forward contract does not pay any dividends, the forward price can be calculated using the following formula:

F = S x e^(r x t)

Where:

F = the contract's forward price

S = the underlying asset's current spot price

e = the mathematical irrational constant approximated by 2.7183

r = the risk-free rate that applies to the life of the forward contract

t = the delivery date in years

For example, assume a security is currently trading at \$100 per unit. An investor wants to enter into a forward contract that expires in one year. The current annual risk-free interest rate is 6%. Using the above formula, the forward price is calculated as:

F = \$100 x e ^ (0.06 x 1) = \$106.18

If the underlying asset pays dividends over the life of the contract, the formula for the forward price is:

F = (S - D) x e ^ (r x t)

Here, D equals the sum of each dividend's present value, given as:

D = PV(d(1)) + PV(d(2)) + ... + PV(d(x)) = d(1) x e ^ -(r x t(1)) + d(2) x e ^ -(r x t(2)) + ... + d(x) x e ^ -(r x t(x))

Using the example above, assume that the security pays a 50-cent dividend every three months. First, the present value of each dividend is calculated as:

PV(d(1)) = \$0.5 x e ^ -(0.06 x 3/12) = \$0.493

PV(d(2)) = \$0.5 x e ^ -(0.06 x 6/12) = \$0.485

PV(d(3)) = \$0.5 x e ^ -(0.06 x 9/12) = \$0.478

PV(d(4)) = \$0.5 x e ^ -(0.06 x 12/12) = \$0.471

The sum of these is \$1.927. This amount is then plugged into the dividend-adjusted forward price formula:

F = (\$100 - \$1.927) x e ^ (0.06 x 1) = \$104.14

RELATED TERMS
1. ### Covered Interest Arbitrage

Covered interest arbitrage is a strategy where an investor uses ...
2. ### Cost Of Carry

Costs incurred as a result of an investment position. These costs ...
3. ### Long Dated Forward

A type of forward contract commonly used in foreign currency ...
4. ### Forward Market

A forward market is an over-the-counter marketplace that sets ...
5. ### Present Value Of An Annuity

The present value of an annuity is the current value of futureÂ payments ...
6. ### Forward Delivery

A delivery of the underlying asset at the date agreed upon in ...
Related Articles

### Apple Earnings: A Lot Depends on iPhone X Outlook

With reports of sluggish iPhone 8 sales, the outlook for Apple's iPhone X will be key.
2. Investing

### What is a Forward Contract?

A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
3. Investing

### Apple Will Kill Off iPhone X This Year: Analyst

Mirabaud Securities, citing excess chip inventory, predicts Apple will discontinue the iPhone X.

### Example of Applying Modern Portfolio Theory (MPS)

Modern Portfolio Theory: brush up on key mathematical framework used in investment portfolio construction.
5. Investing

### Apple: Slow iPhone 8 Sales May Not Be a Bad Thing

A sluggish start may be a good thing if Asian consumers are waiting for the pricier iPhone X.
6. Investing

### iPhone X Demand Won't Be Exceptional: Bernstein

The iPhone X is coming in a few days and a new poll shows that while there will be substantial demand, it won't be exceptional.
7. Investing

### How to Trade Futures Contracts

Futures is short for Futures Contracts, which are contracts between a buyer and seller of an asset who agree to exchange goods and money at a future date, but at a price and quantity determined ...
8. Investing

### Apple May Have Abandoned Plans for Gold iPhone X

Apple filed with the FCC to launch a gold iPhone X in July, but nothing has come of it yet.
9. Investing

### Raymond James Ups Apple PT on iPhone X Demand

Raymond James raised its price target on Apple saying there is surprising demand for new iPhone.
10. Investing

### Apple iPhone X: Long Waits the Norm For Pre-Orders

Users will have to wait five to six weeks, even if they pre-orders the newest iPhone X.
RELATED FAQS
1. ### Why is the initial value of a forward contract set to zero?

Discover why the initial value of a forward contract is set to zero; read about financial mathematics and exchange logic ... Read Answer >>

3. ### How do I convert a spot rate to a forward rate?

The spot rate shows the cost of executing a financial transaction today, while the forward rate provides the cost of executing ... Read Answer >>
4. ### Forward Contracts vs. Futures Contracts

While both forward and futures contracts allow people to buy or sell a specific asset at a specific time at a given price, ... Read Answer >>
5. ### What does it mean to roll a derivative contract?

Find out more about derivative securities, how to roll forward a derivative contract and what it means when a derivative ... Read Answer >>
6. ### What is the Volatility Ratio formula and how is it calculated?

Understand what the volatility ratio indicator is, how it is calculated and the way this technical indicator is used by traders ... Read Answer >>
Hot Definitions
1. ### Return On Equity - ROE

The profitability returned in direct relation to shareholders' investments is called the return on equity.
2. ### Working Capital

Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
3. ### Bond

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
4. ### Compound Annual Growth Rate - CAGR

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
5. ### Net Present Value - NPV

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
6. ### Price-Earnings Ratio - P/E Ratio

The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...