1.6 Forward contracts A forward contract is an agreement to buy or sell an asset at a certain time in the future for a certain price( the delivery price) It can be contrasted with a spot contract which is an agreement to buy or sell immediately It is traded in the otc market Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 1.6 Forward Contracts • A forward contract is an agreement to buy or sell an asset at a certain time in the future for a certain price (the delivery price) • It can be contrasted with a spot contract which is an agreement to buy or sell immediately • It is traded in the OTC market
7 Foreign Exchange Quotes for GBPon aug 16, 2001(See page 3) Bid Offer Spot 1.4452 1.4456 1-month forward 1.4435 1.4440 3-month forward 1.4402 1.4407 6-month forward 1.4353 1.4359 12-month forward.4262 1.4268 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 1.7 Foreign Exchange Quotes for GBP on Aug 16, 2001 (See page 3) Bid Offer Spot 1.4452 1.4456 1-month forward 1.4435 1.4440 3-month forward 1.4402 1.4407 6-month forward 1.4353 1.4359 12-month forward 1.4262 1.4268
18 Forward Price The forward price for a contract is the delivery price that would be applicable to the contract if were negotiated today (i.e, it is the delivery price that would make the contract worth exactly zero The forward price may be different for contracts of different maturities Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 1.8 Forward Price • The forward price for a contract is the delivery price that would be applicable to the contract if were negotiated today (i.e., it is the delivery price that would make the contract worth exactly zero) • The forward price may be different for contracts of different maturities
19 Terminology The party that has agreed to buy has what is termed a long position The party that has agreed to sell has what is termed a short position Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 1.9 Terminology • The party that has agreed to buy has what is termed a long position • The party that has agreed to sell has what is termed a short position
1.10 Example(page 3) On August 16, 2001 the treasurer of a corporation enters into a long forward contract to buy f1 million in six months at an exchange rate of 1.4359 This obligates the corporation to pay $1, 435, 900 for f1 million on February 16.2002 What are the possible outcomes? Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 1.10 Example (page 3) • On August 16, 2001 the treasurer of a corporation enters into a long forward contract to buy £1 million in six months at an exchange rate of 1.4359 • This obligates the corporation to pay $1,435,900 for £1 million on February 16, 2002 • What are the possible outcomes?