What is a forward and futures contract?

Forward and futures contracts involve the agreement between two parties to buy and sell an asset at a specified price by a certain date. A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter (OTC).

What is a forward contract and hedging?

When a forward contract is signed, one party agrees to sell (the supplier), and the other party consents to buy (the company) the underlying asset at a set price at a set future date. Hedging means using financial instruments such as derivative contracts to reduce future risk from increasing prices.

What is the value of a forward contract (long position)?

Therefore, the value of the forward contract (long position) will be: Consider a forward contract that has a term of 2 years. The price of the asset underlying the contract is currently $200 and the risk-free rate is 9%. Given the forward price of $220, the value of the forward contract is closest to:

What is the difference between forward value and price?

The forward value is the opposite and fluctuates as the market conditions change. At initiation, the forward contract value is zero and then either becomes positive or negative throughout the life-cycle of the contract. Value and price are completely different from each other, and that is crucial to understand.