Can someone explain to me the difference between forward prices, pre-paid forward prices, theoretical forward price (assuming they make a contribution you an interest rate) and tell me how the specifics on what happen (who gets salaried, who pays, ect.) I am taking my first actuarial exam in a few days, and I am rather unclear something like this subject, apart from making calculations.
Answers: from wikapedia
A forward contract is an agreement between two party to buy or sell an asset (which can be of any kind) at a pre-agreed adjectives point in time. Therefore, the trade date and nativity date are separated. It is used to control and hedge risk, for example currency exposure risk (e.g., forward contracts on USD or EUR) or commodity prices (e.g., forward contracts on oil).
One gala agrees (obligated) to sell, the other to buy, for a forward price agreed contained by advance. In a forward transaction, no actual bread changes hand. If the transaction is collateralized, exchange of margin will embezzle place according to a pre-agreed rule or schedule. Otherwise no asset of any thoughtful actually change hands, until the later life of the contract.
The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset change hands (on the spot date, usually two business days). The difference between the spot and the forward price is the forward premium or forward discount.
A standardized forward contract that is to say traded on an exchange is called a futures contract.
Example of how the payoff of a forward contract works
Suppose that Bob requests to buy a house in one year's time. At like peas in a pod time, suppose that Andy currently owns a $100,000 house that he wishes to sell within one year's time. Both parties could enter into a forward contract next to each other. Suppose that they both agree on the public sale price in one year's time of $104,000 (more below on why the public sale price should be this amount). Andy and Bob have enter into a forward contract. Bob, because he is buying the underlying, is said to have enter a long forward contract. Conversely, Andy will have the short forward contract.
At the conclusion of one year, suppose that the current market valuation of Andy's house is $110,000. Then, because Andy is grateful to sell to Bob for lone $104,000, Bob will make a profit of $6,000. To see why this is so, one wants only to certify that Bob can buy from Andy for $104,000 and immediately put up for sale to the market for $110,000. Bob have made the difference in profit. In contrast, Andy have made a loss of $6,000.
[edit] Example of how forward prices should be agreed upon
Continuing on the example above, suppose now that the initial price of Andy's house is $100,000 and that Bob enter into a forward contract to buy the house one year from today. But since Andy knows that he can right away sell for $100,000 and place the proceeds surrounded by the bank, he requirements to be compensated for the delayed sale. Suppose that the risk free rate of return R (the edge rate) for one year is 4%. Then the money in the edge would grow to $104,000, risk free. So Andy would want at least $104,000 one year from in a minute for the contract to be worthwhile for him - the opportunity cost will be covered.
Bob, as any other buyer would, will seek the lowest price he can for the contract - although as we've see, there is an invisible lower reduce of $104,000 that Andy will not go below. As a result, the contract price would be at smallest $104,000 or it will not happen at adjectives.
this is a complex topic for sure.. but the agreement is made and money paid surrounded by advance for a adjectives delivery.
fitting luck in your exam
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Answers: from wikapedia
A forward contract is an agreement between two party to buy or sell an asset (which can be of any kind) at a pre-agreed adjectives point in time. Therefore, the trade date and nativity date are separated. It is used to control and hedge risk, for example currency exposure risk (e.g., forward contracts on USD or EUR) or commodity prices (e.g., forward contracts on oil).
One gala agrees (obligated) to sell, the other to buy, for a forward price agreed contained by advance. In a forward transaction, no actual bread changes hand. If the transaction is collateralized, exchange of margin will embezzle place according to a pre-agreed rule or schedule. Otherwise no asset of any thoughtful actually change hands, until the later life of the contract.
The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset change hands (on the spot date, usually two business days). The difference between the spot and the forward price is the forward premium or forward discount.
A standardized forward contract that is to say traded on an exchange is called a futures contract.
Example of how the payoff of a forward contract works
Suppose that Bob requests to buy a house in one year's time. At like peas in a pod time, suppose that Andy currently owns a $100,000 house that he wishes to sell within one year's time. Both parties could enter into a forward contract next to each other. Suppose that they both agree on the public sale price in one year's time of $104,000 (more below on why the public sale price should be this amount). Andy and Bob have enter into a forward contract. Bob, because he is buying the underlying, is said to have enter a long forward contract. Conversely, Andy will have the short forward contract.
At the conclusion of one year, suppose that the current market valuation of Andy's house is $110,000. Then, because Andy is grateful to sell to Bob for lone $104,000, Bob will make a profit of $6,000. To see why this is so, one wants only to certify that Bob can buy from Andy for $104,000 and immediately put up for sale to the market for $110,000. Bob have made the difference in profit. In contrast, Andy have made a loss of $6,000.
[edit] Example of how forward prices should be agreed upon
Continuing on the example above, suppose now that the initial price of Andy's house is $100,000 and that Bob enter into a forward contract to buy the house one year from today. But since Andy knows that he can right away sell for $100,000 and place the proceeds surrounded by the bank, he requirements to be compensated for the delayed sale. Suppose that the risk free rate of return R (the edge rate) for one year is 4%. Then the money in the edge would grow to $104,000, risk free. So Andy would want at least $104,000 one year from in a minute for the contract to be worthwhile for him - the opportunity cost will be covered.
Bob, as any other buyer would, will seek the lowest price he can for the contract - although as we've see, there is an invisible lower reduce of $104,000 that Andy will not go below. As a result, the contract price would be at smallest $104,000 or it will not happen at adjectives.
this is a complex topic for sure.. but the agreement is made and money paid surrounded by advance for a adjectives delivery.
fitting luck in your exam
Resolved Questions: