Lesson 2 of 7 · All lessons in this module
- Forward price versus forward value: inception and expiration
- Valuing a forward during its lifeVideo lesson
- Forwards on assets with costs and benefits
- Pricing and valuing FX forwardsVideo lesson
- Term structure: zero rates and discount factors
- Implied forward ratesVideo lesson
- 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: . 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: .
- 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 equals the present value of ; the spot and forward prices also imply a risk-free rate.
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