This document discusses various types of forward contracts and derivatives. It defines a forward contract as a customized bilateral contract to buy or sell an asset at a specific future price. Forward contracts involve counterparty risk but no cash flows up front. The document outlines how forward positions can be terminated and discusses compensation for dealers. It also provides examples of equity, bond, foreign exchange rate and interest rate forward contracts.

1. Forward Market
And Contracts
Derivatives
Alaleh Mani
2013

2. Introduction
 Forward is a Highly Customized bilateral contract of
obligation to sell(short) and buy (long)physical asset at
a specific price in the future.
 No cash flows at the initiation .
 Exposed to default risk. (Counterpart risk)
 No regulatory control over these contracts.
 Entire profit or loss gets accumulated till the settlement
date.
 Held till expiration.
 No active secondary
 Low liquidity.
 In order to Speculation on the future price
 In order to hedge a risk

3. Terminating the Position
 Entering to a new identical contract to lock in a
minimum loss.
 If the counterpart of the new contract is different
with the first one, the probability of credit risk
would be high.
 Both Forward and Future considered leveraged
instruments because for little or no cash outlay
 Cash Settlement= price movements in the
underlying asset
 Deliverable Forward Contract= Deliver, hold or
warehouse the actual asset.

4. Dealers Compensation
 Banks or securities broker
 Bid and ask spread is for:
1. Compensation
2. Bearing default risk
3. Asset price risk

5. Equity forward contracts
 Underlying asset=Single Stock, Portfolio of stock,
Stock Index
 Portfolio Forward Contract has a better pricing
compare to single stock forward contract due to
less administration cost
 Stock Index forward contract is based on a
notional amount like cash settlement contract.

6.  The contract should be set for a rime before
maturity date of the bond.
 Eurodollar Deposit=deposit dollar in big Banks out
of US
 LIBOR=London Inter Bank Offered Rate
 Euribor established by Euro Central Bank at Toronto
Forward Contract
on Zero Coupon and Bond

7. FRA and Currency forward
contract
A cash settlement contract on (lending /borrowing)
money
(Notional Principal)(Floating-Forward)(days/360) =Payments
1+[(floating)(days/360)]
Currency forward Contract = one party agrees to exchange a
certain amount of one currency for a certain amount of
another currency at a specify exchange rate.