72. Forward Contract Valuation

For an underlying asset that has no holding costs or benefits, the value of a forward contract to the long during the life of the contract is the:

The most likely use of a forward rate agreement is to:

The value of a forward or futures contract is:

At time $t$, prior to its settlement date at time $T$, the value $V_t$ of a long forward with a price of $F_0(T)$ will be related to the spot price, $S_t$, of an asset that has a zero net cost of carry by:

Value of a Forward Contract (No Holding Costs/Benefits)

Purpose of a Forward Rate Agreement (FRA)

Value of a Forward/Futures Contract

Value of a Long Forward Position Prior to Settlement

The value of a forward contract to the long position during the contract's life is the spot price minus the present value of the forward price.
- Vt(T) = St – F0(T) (1 + Rf)–(T–t).
A forward rate agreement's most likely use is to lock in an interest rate for future borrowing or lending.
- An FRA manages interest rate risk.
- An FRA is a forward commitment, not a contingent claim.
- An interest rate swap exchanges a floating-rate obligation for a fixed-rate obligation.
The value of a forward or futures contract is typically zero at initiation.
Upon expiration, its value equals the difference between the spot price and the contract price.
- The price of a forward or futures contract is set when the parties agree to trade the underlying asset on a future date.
The value of a long forward position prior to settlement is:
- Vt = St − F0(T)(1 + Rf)–(T – t), when the net cost of carry is zero.
- Where:
  - t is time
  - T is the settlement date
  - Vt is the value
  - F is the price
  - S is the spot price