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

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Spot price at maturity
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Kyriakos 2003-03-17