Options & Derivatives

Forward Contract

An agreement to buy or sell an asset at a fixed price on a future date.

F = S e^((r - q + u)T), where r is the interest rate, q is income and u is storage.

The forward price is not a forecast. It is fixed by no-arbitrage: a dealer can buy the asset today, finance it and hold it to delivery. That replication determines the price, and anyone's opinion about the future is irrelevant to it.

Counter-intuitive consequence: for an index with dividend yield above the interest rate, the forward trades below spot. Forwards are not always higher.

Full guide

Forwards, Futures and the Cost of Carry

Why the forward price is not a forecast, how carry determines it, and the difference futures margining makes.

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