Forwards and Futures

A forward is a contract between two parties in which one agrees to purchase from the other a specified asset at a specified price for delivery at a specified future date. The following discussion refers to these variables  

P = the current price of the underlying asset, also known as the spot price 

Pt = the spot price of the underlying asset at the time of delivery X = the delivery price specified in the forward contract T = the term to maturity of the contract, in years, also referred to as the time to delivery 

F= the current forward price, that is, the current market prediction of the underlying assets price on the delivery date 

The payout yield, R, is the percentage of the spot price that is paid out at contract expiry, i.e., R = Pt-X) / Pt- The forward contract terms are set so that the present value of the payout Pj - X) is zero. This means that the forward price, F, on day one of the contract equals X (Note that the forward price is not the same as the value of the contract, which at this point is zero.) From the initiation of the contract until its expiration, the value ofXremains fixed. The forward price, F, however, fluctuates, generally rising and falling with the spot price of the underlying asset. 

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FIGURE 6.1 Cash Flows for Forwards and Futures Contracts... 

The products discussed include interest rate swaps, options, and credit derivatives. There is also a chapter on the theory behind forward and futures pricing, with a case smdy feamring the price history and implied repo rate for the CBOT long bond future. 

Aside from how they are constructed and traded, the most significant difference between forwards and futures, and the feature that influences differences between their prices, concerns their cash flows. The profits or losses from futures trading are realized at the end of each day. Because of this daily settlement, at expiration all that needs to be dealt with is the change in the contract value from the previous day. With forwards, in contrast, the entire payout occurs at contract expiry. (In practice, the situation is somewhat more complex, because the counterparties have usually traded a large number of contracts with each other, across a number of maturity periods and, perhaps, instruments, and as these contracts expire, they exchange only the net loss or gain on the contract.)... 

Park, K., 2014. The controlled drug deUveiy systems past forward and future back. J. Control. Release 28 (190), 3-8. 

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