A short position in a forward contract whereby an investor agrees to sell the underlying asset on a specified future date for a preset price. The payoff from a short forward contract on one unit of the underlying is the delivery price of the contract minus the spot price of the asset at maturity, or in equation form:
Payoff = K – ST
The holder of this contract is obligated to sell the underlying asset, worth the spot price ST, at the delivery price K. If the spot price is lower than the delivery price, the contract’s payoff will be positive (gain), and vice versa.
