Forward
A Forward is an agreement to deliver a fixed quantity of an underlying
security in exchange for an amount of currency, where the amount of the exchanged
currency is determined at the time that the agreement is entered into.
When the underlying security is a currency, such a security is known as a
Currency Forward. It can be used to hedge a known foreign exchange exposure in the
underlying currency.
The following is the screen display for a Forward that will deliver CAD 10,000
in exchange for USD on December 31, 2001:
The amount of USD that will be exchanged for the CAD on December 31, 2001 will
be decided at the date that this Forward is traded between two parties.
The following describes some attributes of Forwards:
Transaction Currency:
For Forward transactions, the exchange currency must be the same as the transaction currency.
Contract Expiry Date:
In the case of exchange traded futures contracts, this is the date that the
contract stops trading and the current two parties of the contract must arrange
to make and receive delivery.
Delivery Date:
This is the date on which the exchange, as specified by the contract, must
occur.
Earnings:
There are no earnings associated with positions in Forwards.
Valuation:
The value of a Forward is obtained by using standard finance formulas. [See Hull.]
To value a general Forward at a particular World State, it is necessary for
that World State to contain:
To value a Currency Forward at a particular World State, it is necessary for
that World State to contain:
- An Exchange Rate Structure with all the currencies involved.
- The Sovereign Yield Curves for all the currencies involved.
Pricing:
The price of a specified Forward can also be obtained by using the Valuation
window and directly specifying the variables required by the pricing formula:
