Forward Contract

( straight and simple - a contract done for future )

A customized contract between two parties to buy or sell an asset at a

specified price on a future date.
Price is agreed today. The price agreed upon is called the delivery price,
which is equal to the forward price at the time the contract is entered into.

Long Position - The party agreeing to buy the underlying asset in the future
assumes a long position. Long position means the holder of the position owns
the security and will profit if the price of the contract goes up.
Short Position - the party agreeing to sell the asset in the future assumes a
short position.
short position in a futures contract or similar derivative means that the holder
of the position will profit if the price of the futures contract or
derivative goes down.

Features of forward contracts :

Highly customized - Counterparties can determine and define the

terms and features to fit their specific needs, including when delivery
will take place and the exact identity of the underlying asset.

All parties are exposed to counterparty default risk - This is the risk
that the other party may not make the required delivery or payment.

Transactions take place in large, private and largely unregulated

markets consisting of banks, investment banks, government and
corporations.

Underlying assets can be a stocks, bonds, foreign currencies,

commodities or some combination thereof. The underlying asset could
even be interest rates.

They tend to be held to maturity and have little or no market liquidity.

Any commitment between two parties to trade an asset in the future is

a forward contract.

Forward Spread Agreement A specialized forward rate agreement that protects the parties from future
changes in the spread between interest rates involving different
currencies. An indexed rate, plus or minus the agreed spread, is used at
settlement. It can also be a forward that settles at a basis between two
previously agreed upon rates.
Just like if the value of currency changes. eg Rupees per US Dollar. Those
agreements are made.

Payoff Formula

Synthetic Agreement for Forward Exchange (SAFE)

A synthetic agreement for forward exchange (SAFE) is a transaction
between parties seeking to protect themselves against future movements
in foreign exchange swap spreads.
A SAFE can either be of two types
1. Exchange Rate Agreement (ERA)
2. Forward exchange agreement (FXA).

1. Exchange Rate Agreement (EXA)

An exchange rate agreement (ERA) is a transaction through which parties
seek to protect themselves against future movements in foreign exchange
swap spreads.
The parties agree at the dealing date to compensate each other at the
near date (i.e., the date on which settlement occurs) for any discrepancy
between the swap margin arranged at the dealing date and the notional

swap margin predominant on the fixing date for a specified contract

period.

2. Forward exchange agreement (FXA)

A forward exchange agreement (FXA) is a transaction through which
parties seek to protect themselves against future movements in foreign
exchange swap spreads.
Two parties agree that one party will be required to compensate the other
for any difference between the swap margin agreed at the dealing date
and the notional swap margin prevailing on a specified future date (fixing
date) for a specified contract period.
The FXA also sets a notional outright forward exchange rate for the
settlement date.

Curreny exchange rates in India

Euro = 78.038687
US Dollar = 60.829986
British Pound = 99.149835
Australian Dollar = 54.305970
Canadian Dollar = 55.491686
Emirati Dirham = 16.560964
Swiss Franc
= 64.665284
Chinese Yuan Renminbi = 9.901842
Malaysian Ringgit = 18.808065
New Zealand Dollar = 49.439571

Value of Forward Contract

f=(F-K) exp{-rT} where K is the forward price when contract is signed, F is
the current forward price, and f is the current forward value.
f = (F-K

Example: If K=$230, F=$200, r=4%, T=0.5, then the forward has a

negative value of
(200-230)exp{-0.04*0.5}= -$29.405
If the forward is to be closed out today, the long party should compensate
the short party $29.4.

Forward Contract Delivery

A delivery of the underlying asset at the date agreed upon in a forward
contract. At the forward delivery, one party will supply the underlying
asset and one will buy the asset. The terms and price of the asset was the
one agreed upon at the onset of the contract or trade date.
The contract must include the security to be sold, the price at which it is
to be sold, the date the payment is to be received and include any other
terms of the trade. Forward contracts are normally used to hedge the
party from negative price fluctuations in the underlying asset
Similar for rest