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Unformatted text preview: They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged. Advantages: 5/30/11 FORWARDS The value of a forward position at maturity depends on the relationship between the delivery price ( K ) and the underlying price ( ST ) at that time. For a long position this payoff is: fT = ST K For a short position, it is: fT = K ST...
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- Spring '11