The Derivatives-on-Line Pages

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The forward contract

The forward contract is an over-the-counter [OTC] agreement between two parties, to buy or sell an asset at a certain time in the future for a certain price.

Usually, the delivery price is such that the initial value of the contract is zero. The contract is settled at maturity. For example, a long forward position with delivery price $ K$ will have the payoffs shown in figure 1.2.

Figure 1.2: Forward contract payoffs

\begin{texdraw} \drawdim cm %% \linewd 0.02 %% \move(1 1) %% \avec(1 5) %% \move... ... \centering %% \small %% Spot price at maturity \end{minipage}} %% \end{texdraw}

next up previous contents
Next: The futures contract Up: Introduction Previous: Why derivatives?   Contents
Kyriakos 2003-03-17