Glossary — M05: Pricing and Valuation of Forward Contracts

Term	Definition
Forward price	The price ( $F_{0} (T)$ ) agreed at inception for future delivery, determined by no-arbitrage: $F_{0} (T) = S_{0} \times (1 + r)^{T}$
Forward value	The current worth of an existing forward contract to a party; zero at inception, fluctuates during the contract’s life: $V_{t} = S_{t} - F_{0} (T) / (1 + r)^{T - t}$
Forward rate agreement (FRA)	A forward contract on an interest rate; the buyer (long) profits if the market reference rate exceeds the agreed forward rate at settlement
Implied forward rate (IFR)	The future interest rate implied by current spot rates for adjacent periods; the rate that makes the FRA have zero value at inception
No-arbitrage forward price	The forward price derived from the cost of carry model that eliminates arbitrage opportunities
Cost of carry (in forward pricing)	The net cost of holding the underlying: $F_{0} (T) = [S_{0} - P V (I) + P V (C)] \times (1 + r)^{T}$ , where $I$ = income, $C$ = costs
Carry benefits	Income received from holding the underlying (dividends, coupons, convenience yield) that reduces the forward price
Carry costs	Costs incurred from holding the underlying (storage, insurance, financing) that increases the forward price
Physical settlement	Forward settlement by delivering the actual underlying asset in exchange for the forward price
Cash settlement	Forward settlement by paying the cash difference between the spot price at expiration and the forward price
Off-market forward	A forward contract with a non-zero value at inception because the forward price is set away from the no-arbitrage level; requires a cash payment to compensate
Settlement amount (FRA)	$= \frac{( MRR - IFR ) \times Notional \times Period}{1 + MRR \times Period}$ — the PV of the rate difference paid at settlement

See Also