An agreement (forward contract) between two counterparties to buy or sell a fixed income instrument at a specified date, price, and amount at a certain future date. This specific type of forward contract is used for hedging the cost (for a buyer) or the price (for a seller) of such instruments or even for speculation on future trajectory of the price by locking in the fixed income delivery price today.
A fixed income forward is a derivatives contract to trade fixed-income securities at a certain date in the future, but at a price determined and fixed today (the spot price). The contract carries a value equal to the fixed income security’s price, over the life of the contract or up to a certain point in time, after deducting the present value of coupons and the present value of maturity price:
Fixed-income security value = security price – PV of coupons – PV of maturity price
For a buyer (long the forward contract), the contract is profitable when the product of the above calculation is positive. For a seller, a negative product is a positive outcome.
Financial derivatives, such as options, futures, and forward contracts, are sophisticated financial instruments whose value is derived from underlying assets like stocks, debt instruments, and interest rates. Derivatives, in all their types, allow investors to hedge against potential market risks, while creating certain opportunities to obtain higher returns through the power of leverage.
The underlying asset in a fixed-income forward is a fixed-income investment in which periodic income is received at preset, regular intervals. By using forward contracts on fixed-income assets, investors can fix the price of the fixed income instrument at the present while having the potential to acquire or sell the actual instrument in the future
A fixed income forward contract or forward rate agreement (FRA) is a financial derivative contract that allows its holder (the user or investor) to borrow or lend money at a specific rate later in the future. In practice, these contracts settle in cash, but no actual money is extended as loan at the settlement date.
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