FORWARD - They are bilateral contracts and hence exposed to...

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Click to edit Master subtitle style 5/30/11 FORWARDS A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. Forward Contracts are NOT Investments; they are simply agreements to engage in a trade at a future time and at a fixed price. Thus, it costs NOTHING to enter into such a contract;
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5/30/11 FORWARDS The salient features of forward contracts are:
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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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FORWARD - They are bilateral contracts and hence exposed to...

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