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Unformatted text preview: EC3070 FINANCIAL DERIVATIVES FORWARD CONTRACTS In a forward contract, a party agrees to buy or sell an asset at a given price at a future date τ . The party that agrees to buy the asset, is taking a long position. The party that is selling is taking a short position. The spot price S τ is the price in the open market of the asset of time τ . The delivery price K τ is the price agree in the forward contract for the transaction that is to be enacted at time τ , when the money is paid and the delivery is taken. The forward price F τ | t is the price prevailing at time t for a delivery that is scheduled for time τ . When the contract is written, the delivery price is the prevailing forward. We denote this by writing K τ = F τ | t . After time t , the forward price and the delivery price may diverge. The returns to the party taking the short position in the forward contract is K τ − S τ . The party taking the short position is paid a sum of K τ at time τ and they relinquish an asset that is valued at S τ on the open market at that time. Theon the open market at that time....
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- Spring '12
- Forward contract, short position, kτ