The price the buyer pays to the seller today for a prepaid forward contract. It equals the underlying price minus the present value of the promised income receipts:
Prepaid forward price = S- PVI
Where the underlying asset distributes discrete specific cash flows (such as dividend payments) over time. If the underlying asset has a zero yield (PVI=0) as in the case of a non-dividend stock, the prepaid forward price would be simply the current spot price.
The underlying asset could virtually be any type of assets: stocks, currencies, futures, etc.
For example, suppose the current price of a given share of stock is $100. This stock is bought via a prepaid forward contract that matures in 4 months. If dividends are $2 per month, and the market interest rate is 4%, then:
Prepaid forward price = 100 – 2 e– 0.04/4 = $98.02
The prepaid forward price is what a buyer pays today for the delivery of the stock 4 months from now. The buyer doesn’t receive the dividend payment until maturity.
