What is the value of a forward contract?

Upon the agreement’s commencement, the contract is valued at 0 since market conditions have yet to change. A forward contract’s value may become negative or positive, depending on price fluctuations of the underlying asset. The forward price accounts for various factors.

What is a forward price?

Forward price refers to an asset’s future delivery price agreed upon by the buyer and seller of a forward futures contract. This type of contract has zero value at inception as market conditions have yet to change. Investors determine a forward price by adding carrying costs to the underlying asset's spot price.

Can a forward contract be used for hedging?

A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging . A forward contract is a customizable derivative contract between two parties to buy or sell an asset at a specified price on a future date.

What is the risk-free rate for a forward contract?

Josh is looking to enter into a forward contract for an investment asset currently trading at $1,000. The risk-free rate in Josh’s country is 4%. The forward price for this asset can be calculated as: Also, in situations where carrying costs arise, the forward price formula can be expanded to account for the costs, as seen below: