Valuation of the Forward Contracts

Subject: Law
Pages: 2
Words: 320
Reading time:
2 min

Valuation of the forward contracts generally depends on the market position of the contracted object and the values of the agreed conditions. The fact is that the positive or negative values of the contract may be defined by the tendencies of the market. Thus, if the price of the agreed object is going to decrease, the buyer is not protected from the possible risks and losses. On the other hand, the seller will not be able to get the money at once, since the purchase is delayed, consequently, the compensation for the potential loss is included in the obligations of the contract. Otherwise, the price may stay at the same level, thus, the seller needs to get ensured from the possible losses, as the gained money may be deposited, or invested, thus, considering the potential profit, the contacted price may be changed, to compensate the loss of this potential profit. As it was claimed by Brousseau and Glachant:

The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes direct the spot date. The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party. Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time sensitive. In the light of this statement, it should be emphasized that market positions strongly depend on the marketing tendencies and the values of the contracted objectives. Consequently, the values, defined in the forward contracts are just the margins, required for risk insurance, which the contracting parties may face, if the values are left unchanged.