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Derivatives




Forward Price


The price of the underlying asset of a forward contract. In other words, it is the price at which a seller, in a forward contract, delivers an underlying commodity, financial derivative, or currency to the buyer at a preset future date. It is approximately equal to the spot price plus any corresponding carrying costs such as storage costs, interest payment, etc. The delivery price is set in a forward contract so that the contract value is caused to be zero. On the rational pricing assumption, for a forward contract with a tradable underlying asset, the forward price is expressed in terms of the spot price and any dividends (if the underlying is a dividend-paying stock). The relationship between the current spot price and the forward price defines specific market situation such as contango and forwardation.

As a general rule, the present value of the forward price (calculated at the risk-free rate) equals the spot price of the underlying, or forward price is typically equal to the spot price plus interest at risk-free rate.



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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