Lesson 2 of 7 · All lessons in this module
  1. Forward price versus forward value: inception and expiration
  2. Valuing a forward during its lifeVideo lesson
  3. Forwards on assets with costs and benefits
  4. Pricing and valuing FX forwardsVideo lesson
  5. Term structure: zero rates and discount factors
  6. Implied forward ratesVideo lesson
  7. Forward rate agreements (FRAs)Video lesson

Lesson 2 of 7 · 13 min

Valuing a forward during its life

Before maturity, a long forward is worth the spot price today minus the present value of the forward price, discounted over the time left.

In short

  • MTM value of a long forward at time t: Vt(T)=St−F0(T)(1+r)−(T−t)V_t(T) = S_t - F_0(T)(1+r)^{-(T-t)}. The short's value is the negative of this.
  • Discount over the remaining time, T − t, not the original life T.
  • A rise in the spot price helps the long and hurts the short. An instant jump at t = 0 changes the value one-for-one: V0=S0+−S0V_0 = S_0^{+} - S_0.
  • A rise in the risk-free rate lowers the present value of the forward price, which raises the long's value and lowers the short's.
  • The value is zero whenever StS_t equals the present value of F0(T)F_0(T); the spot and forward prices also imply a risk-free rate.

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