Forward contract

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In the financial field, forward contract or just forward is a non-standard contract between two parties to buy or sell future assets at an agreed price today, making it a kind of derivative instrument. Parties that agree to purchase the underlying asset in the future assume the old position, and the party that agrees to sell the asset in the future assumes a short position. The agreed price is called the shipping price, which is the same as the forward price at the time the contract is entered.

The price of the underlying instrument, in whatever form, is paid before controlling the instrument changes. This is one of the many forms of buy/sell orders in which time and date of trading are not the same as the date on which the effect itself is exchanged. In the future, such as other derivative securities, can be used to protect risks (usually currency or exchange risk), as a means of speculation, or to enable parties to take advantage of the quality of time-sensitive underlying instruments.

The closely related contracts are futures contracts; they differ in certain things. The forward contracts are very similar to futures contracts, unless they are not traded on the exchange, or defined on standard assets. In the future it also usually does not have a temporary partial settlement or "true-up" in margin requirements such as futures - in such a way that the parties do not exchange additional properties that secure the party on profit and all unrealized gains or losses increase when the contract is opened. However, with over-the-counter trades (OTC), forward contract specifications can be customized and may include a mark-to-market and daily margin call. Therefore, future contractual arrangements may require the losers to pledge collateral or additional security to better secure the beneficiaries. In other words, the terms of the forward contract will determine the guarantee call based on certain "trigger" events relevant to a particular counterparty such as, among others, credit ratings, the value of the managed assets or exchange for a specified period of time, eg, quarterly, annually, etc.

Video Forward contract

Earnings

Nilai posisi maju pada saat jatuh tempo tergantung pada hubungan antara harga pengiriman ( ${\ displaystyle K}  ÂÂ$ ) dan harga dasar ( ${\ displaystyle S_ {T}}  ÂÂ$ ) pada waktu itu.

• Untuk posisi panjang, hasil ini adalah: ${\ displaystyle f_ {T} = S_ {T} -K}  ÂÂ$
• Untuk posisi pendek, itu adalah: ${\ displaystyle f_ {T} = K-S_ {T}}  ÂÂ$

Since the final value (at maturity) of the future position depends on the spot price which will then apply, this contract can be seen, from a purely financial point of view, as a "bet on future spot price"

Maps Forward contract

How forward contracts

Suppose that Bob wants to buy a house a year from now. At the same time, assume Andy currently has a $ 100,000 house he wants to sell for a year from now. Both parties can enter into forward contracts with each other. Suppose they both agree a one-year selling price of $ 104,000 (more below why it should be this big). Andy and Bob have signed forward contracts. Bob, because he bought the underlying, is said to have signed a long-term contract. Instead, Andy will have a short-term contract.

At the end of one year, assume that Andy's current home market valuation is $ 110,000. Then, because Andy was obliged to sell to Bob for just $ 104,000, Bob would make $ 6,000. To find out why, people only need to know that Bob can buy from Andy for $ 104,000 and immediately sell to the market for $ 110,000. Bob has made a difference in earnings. Instead, Andy has lost the potential $ 6,000, and the actual profit is $ 4,000.

A similar situation works between currencies, where one party opens a futures contract to buy or sell currencies (eg contracts to buy Canadian dollars) for expiration/settlement in the future, because they do not want to be exposed to exchange rate/currency risk over the certain time. As the exchange rate between the US dollar and the Canadian dollar fluctuates between the trading date and earlier than the date when the contract closes or the expiration date, one party and the other party's profits lose as one currency strengthens against another. Sometimes, a buy forward is opened because the investor will really need a Canadian dollar in the future such as paying debt that is denominated in Canadian dollars. Other times, the forward party does so, not because they need the Canadian dollar or because they limit the currency risk, but because they speculate on the currency, expect the exchange rate to move positively to generate profits at the close of the contract.

In the foreseeable currency, the notional sum of the specified currency (eg: contract to buy $ 100 million Canadian dollar is equivalent to, say $ 75.2 million USD at the current rate - these two sums are called the notional number (s)). While the notional amount or reference amount may be a substantial amount, the cost or margin requirement to order or open such a contract is much less than that amount, which refers to the leverage made, which is typical in the derivative contract.

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An example of how forward prices should be agreed

Continuing the example above, assume now that the initial price of Andy's house is $ 100,000 and that Bob entered into a futures contract to buy a one-year home starting today. But since Andy knew that he could soon sell for $ 100,000 and put the proceeds in the bank, he wanted to be compensated for pending sales. Suppose the rate of return of risk free R (bank rate) for one year is 4%. Then the money in the bank will grow to $ 104,000, risk free. So Andy wants at least $ 104,000 a year from now for a contract to be valuable to him - the opportunity cost will be covered.

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Spot-forward parity

For liquid assets ("tradable"), the spot-forward balance provides a link between the spot market and the forward market. This illustrates the relationship between the spot price and the forward price of the underlying asset in the forward contract. While the overall effect can be described as carry cost , this effect can be broken down into different components, specifically whether the asset:

• pay income, and if so whether this is discrete or ongoing
• incurring storage costs
• is considered as
  • an investment asset , ie assets owned primarily for investment purposes (eg gold, financial securities);
  • or consumption assets , ie assets held primarily for consumption (eg oil, iron ore etc.)

Investment assets

Untuk aset yang memberikan tidak ada pendapatan , hubungan antara arus maju ( ${\ displaystyle F_ {0}}  ÂÂ$ ) dan tempat ( ${\ displaystyle S_ {0}}  ÂÂ$ ) harga adalah

${\ displaystyle F_ {0} = S_ {0} e ^ {rT}}  ÂÂ$

where ${\ displaystyle r}$ is the combined free return risk rate, and T is the time to maturity. The intuition behind these results is that by giving you the desire to own assets at T , there should be no difference in the perfect capital market between buying assets today and holding them and buying forward contracts and taking delivery. Thus, both approaches should cost the same in terms of present value. For arbitration evidence why this is happening, see the Rational pricing below.

Untuk aset yang membayar pendapatan yang diketahui , hubungannya menjadi:

• Diskrit: ${\ displaystyle F_ {0} = (S_ {0} -I) e ^ {rT}}  ÂÂ$
• Terus-menerus: ${\ displaystyle F_ {0} = S_ {0} e ^ {(r-q) T}}  ÂÂ$

di mana ${\ displaystyle I =}  ÂÂ$ nilai sekarang dari pendapatan diskrit pada saat ${\ displaystyle t_ {0} & lt; T}  ÂÂ$ , dan ${\ displaystyle q \% p.a.}  ÂÂ$ adalah hasil dividen yang terus diperparah selama masa kontrak. Intuisi adalah bahwa ketika suatu aset membayar pendapatan, ada manfaat untuk memegang aset daripada maju karena Anda dapat menerima penghasilan ini. Oleh karena itu, pendapatan ( ${\ displaystyle I}  ÂÂ$ atau ${\ displaystyle q}  ÂÂ$ ) harus dikurangkan untuk mencerminkan manfaat ini. Contoh aset yang membayar pendapatan terpisah mungkin adalah saham, dan contoh aset yang membayar imbal hasil berkelanjutan mungkin berupa mata uang asing atau indeks saham.

For investment assets that are commodities , such as gold and silver, the cost of storage should also be considered. Storage costs can be treated as 'negative revenue', and such revenue can be discrete or sustainable. So with storage costs, the relationship becomes:

• Discrete: $Â\; ÂÂ\; Â\; Â\; ÂÂ\; Â\; Â\; Â\; Â{\displaystyle Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂF_{Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â0Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â}Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â=()\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂS_{Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â0Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â}Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂÂ\; Â\; Â\; Â\; Â\; Â\; Â\; ÂUÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â)Â\; Â\; Â\; Â\; Â\; Â\; Â\; Âe^{Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂrÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂTÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â}Â\; Â\; Â\; Â\; Â\; Â}Â\; Â\; Â\; ÂAnnotation\; encoding\; =\; "application/x-tex">\; \{\backslash \; displaystyle\; F\_\; \{0\}\; =\; (S\_\; \{0\}\; U)\; e\; ^\; \{rT\}\}\; Â\; Â$
• On the contrary: ${\ displaystyle F_ {0} = S_ {0} e ^ {(r u) T}}$

di mana ${\ displaystyle U =}  ÂÂ$ nilai sekarang dari biaya penyimpanan diskrit pada saat ${\ displaystyle t_ {0} & lt; T}  ÂÂ$ , dan ${\ displaystyle u \% p.a.}  ÂÂ$ adalah biaya penyimpanan yang terus diperparah di mana proporsional dengan harga komoditas, dan karenanya merupakan 'hasil negatif'. Intuisi di sini adalah karena biaya penyimpanan membuat harga akhir lebih tinggi, kita harus menambahkannya ke harga spot.

Aset konsumsi

Consumption assets are usually commodities of raw materials used as energy sources or in production processes, such as crude oil or iron ore. Users of this consumption commodity may feel that there is a benefit of physically holding assets in inventory as opposed to holding an asset backer. These benefits include the ability to "profit from" (hedge against) temporary shortcomings and the ability to keep the production process running, and referred to as convenience results . Thus, for consumption assets, the spot-forward relationship is:

• Discrete storage cost: $Â\; Â{\displaystyle Â\; Â\; Â\; Â\; Â\; Â\; Â}$ _{         F                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,                          =        (        S                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,                                   U        )                   e                      (      Â      ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÃ, -   Â  <           )       ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯                                {\ displaystyle F_ {0} = (S_ {0} U) e ^ {(r-y) T}}  Â}
• Continuous storage cost: $Â\; Â{\displaystyle Â\; Â\; Â\; Â\; Â\; Â\; Â}$ _{         F                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,                          =        S                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,                                    e                      (      Â      Â             u     ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÃ, -   Â  <           )       ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯                                {\ displaystyle F_ {0} = S_ {0} e ^ {(r u-y) T}}  Â}

where ${\ displaystyle y \% p.a.}$ are the result of convenience during the contract period. Because convenience results provide benefits to an asset holder but not a downturn, it can be modeled as a 'dividend yield' type. However, it is important to note that comfort is a non-cash item, but rather reflects market expectations about the availability of future commodities. If the user has a low commodity inventory, this implies a possibility of a larger deficiency, which means higher yields. The opposite is true when high supplies exist.

Carrying cost

The relationship between the spot price and the advanced price of an asset reflects the net cost of holding (or carrying) the asset relative to the forward holding. Thus, all the above costs and benefits can be summarized as the cost of carry , ${\ displaystyle c}$ . Therefore,

• Discrete: $Â\; Â{\displaystyle Â\; Â\; Â\; Â\; Â\; Â\; Â}$ _{         F                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,                          =        (        S                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,                                   U         -          I        )                   e                      (      Â      ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÃ, -   Â  <           )       ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯                                {\ displaystyle F_ {0} = (S_ {0} U-I) e ^ {(r-y) T}}  Â}
• Continuously: $Â\; Â{\displaystyle Â\; Â\; Â\; Â\; Â\; Â\; Â}$ _{         F                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,                          =        S                ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,                                    e                 ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂï <½Â       ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯                          ,                    where            ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂï mi½Â <Â>         =          r         -          q                 u         -          y         .           {\ displaystyle F_ {0} = S_ {0} e ^ {cT}, {\ text {where}} c = rq uy.}  Â}

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The relationship between forward price and expected upcoming spot price

The market's view of how much spot price of an asset in the future is the expected future price spot . Therefore, the key question is whether current forward prices really predict future spot prices in the future. There are a number of different hypotheses that try to explain the relationship between current prices, ${\ displaystyle F_ {0}}$ and future expected spot price, ${\ displaystyle E (S_ {T})}$ .

Economists John Maynard Keynes and John Hicks argue that in general, the natural hedger of a commodity is those who want to sell the commodity at that point in time. Thus, hedger will collectively hold a short net position in the forward market. The other side of this contract is held by speculators, who therefore must have a net long position. Hedgers are interested in reducing risk, and thus will receive lost money on their forward contracts. Speculators on the other hand, are interested in making a profit, and therefore will only enter a contract if they expect to make money. So, if the speculator holds the net long position, it should be the case that the expected future spot price is greater than the forward price.

Dengan kata lain, hasil yang diharapkan untuk spekulator pada saat jatuh tempo adalah:

${\ displaystyle E (S_ {T} -K) = E (S_ {T}) - K}  ÂÂ$ , di mana ${\ displaystyle K}  ÂÂ$ adalah harga pengiriman pada saat jatuh tempo

Jadi, jika spekulan mengharapkan untung,

${\ displaystyle E (S_ {T}) - K & gt; 0}  ÂÂ$

${\ displaystyle E (S_ {T}) & gt; K}  ÂÂ$

${\ displaystyle E (S_ {T}) & gt; F_ {0}}  ÂÂ$ , seperti ${\ displaystyle K = F_ {0}}  ÂÂ$ ketika mereka memasuki kontrak

Situasi pasar ini, di mana ${\ displaystyle E (S_ {T}) & gt; F_ {0}}  ÂÂ$ , disebut sebagai keterbelakangan normal. Harga forward/futures menyatu dengan harga spot pada saat jatuh tempo, seperti dapat dilihat dari hubungan sebelumnya dengan membiarkan T pergi ke 0 (lihat juga dasar); maka keterbelakangan normal menyiratkan bahwa harga berjangka untuk kedewasaan tertentu meningkat seiring waktu. Situasi sebaliknya, di mana ${\ displaystyle E (S_ {T}) & lt; F_ {0}}  ÂÂ$ , disebut sebagai contango. Demikian pula, contango menyiratkan bahwa harga berjangka untuk jatuh tempo tertentu jatuh seiring waktu.

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Penentuan harga rasional

Jika ${\ displaystyle S_ {t}}  ÂÂ$ adalah harga spot suatu aset pada saat ${\ displaystyle t}  ÂÂ$ , dan ${\ displaystyle r}  ÂÂ$ adalah laju gabungan terus-menerus, kemudian harga maju pada waktu mendatang ${\ displaystyle T}  ÂÂ$ harus memenuhi ${\ displaystyle F_ {t, T} = S_ {t} e ^ {r (T-t)}}  ÂÂ$ .

To prove this, suppose not. Then we have two possible cases.

Kasus 1: Misalkan ${\ displaystyle F_ {t, T} & gt; S_ {t} e ^ {r (T-t)}}  ÂÂ$ . Kemudian seorang investor dapat mengeksekusi perdagangan berikut pada waktu ${\ displaystyle t}  ÂÂ$ :

1. pergi ke bank dan mendapatkan pinjaman dengan jumlah ${\ displaystyle S_ {t}}  ÂÂ$ pada laju gabungan yang terus-menerus;
2. dengan uang ini dari bank, beli satu unit aset untuk ${\ displaystyle S_ {t}}  ÂÂ$ ;
3. masuk ke dalam satu kontrak jangka pendek dengan biaya 0. Sebuah kontrak jangka pendek berarti bahwa investor berhutang kepada pihak rekanan aset pada saat ${\ displaystyle T}  ÂÂ$ .

The initial cost of trading in the initial amount of time becomes zero.

Pada saat ${\ displaystyle T}  ÂÂ$ investor dapat membalikkan perdagangan yang dieksekusi pada saat ${\ displaystyle t}  ÂÂ$ . Secara khusus, dan mencerminkan perdagangan 1., 2. dan 3. investor

1. 'membayar kembali pinjaman ke bank. Arus masuk ke investor adalah ${\ displaystyle -S_ {t} e ^ {r (T-t)}}  ÂÂ$ ;
2. 'menyelesaikan kontrak jangka pendek dengan menjual aset untuk ${\ displaystyle F_ {t, T}}  ÂÂ$ . Arus kas masuk ke investor sekarang ${\ displaystyle F_ {t, T}}  ÂÂ$ karena pembeli menerima $    ÂÂ$

   Source of the article : Wikipedia