Compute current mark-to-market value of a forward contract from spot, forward price, rate, and time.
Contract Parameters
Valuation of existing Forward Contracts
Valuation Formula
V_long = (S × e^(-qt)) - (K × e^(-rt))
Valuation compares the Present Value of the Spot Asset (adjusted for dividend yield q) against the Present Value of the Delivery Price K (discounted by risk-free rate r). For a Short position, the formula is reversed.
Usage of this Calculator
Why mark-to-market?
Corporate Treasurers
Monitor the value of FX or Commodity hedges. If a hedge is deeply "out of the money," it may require posting collateral or impact earnings reports.
Credit Risk Officers
Assess counterparty exposure. A positive forward value represents a credit risk (if the counterparty defaults, you lose the profit).
Fund Accountants
Perform daily or monthly Mark-to-Market (MtM) valuations for Net Asset Value (NAV) calculations.
Speculators
Determine the profit to be realized if a position is closed out early (by entering an offsetting contract).
Summary
The Forward Contract Value Calculator brings transparency to Over-the-Counter (OTC) derivatives.
It distinguishes between the Initial Price (where value is zero) and the Current Value (which fluctuates).
It highlights how interest rates and spot prices push the value in favor of the Long or Short party.
It is the essential tool for managing the financial health of a derivatives book.
Unlike Futures, Forward contracts are not settled daily. Their value fluctuates wildly between inception and maturity. Understanding how to mark these positions to market is critical for risk management.
It is crucial to distinguish between Pricing and Valuation in derivatives.
Pricing determines the Delivery Price (K) at the start of the contract such that the initial value is ZERO.
Valuation determines the dollar value of that contract at any later point in time (t) before maturity, as market conditions change.
When you enter a forward contract, you typically pay nothing upfront. The value is zero. As the spot price moves, the contract gains positive or negative value.
The Valuation Formula
The value of a forward contract is essentially the difference between the Current Forward Price for the remaining time and the Original Delivery Price (K), discounted to the present.
Value of a Long Position
A Long position wins if the Spot price goes up.
Value = S e-qt - K e-rt
Value of a Short Position
A Short position wins if the Spot price goes down.
Value = K e-rt - S e-qt
Key Value Drivers
What causes the value of your forward contract to change?
1. Spot Price Movements
This is the dominant driver. For a Long position, every $1 increase in the Spot price increases the contract value by approx $1 (discounted).
2. Time Decay
As time passes (t decreases), the discounting factors approach 1. The value converges to the intrinsic value (Spot - K) at maturity.
3. Interest Rates
Higher interest rates decrease the Present Value of the Delivery Price (K). This works in favor of the Long position (who pays K) and against the Short position (who receives K).
Forward Specific Risks
Unlike exchange-traded futures, Forwards are Over-the-Counter (OTC) instruments.
Counterparty Credit Risk: If your forward contract has a high positive value (e.g., $1M profit), you are exposed to the risk that the other party defaults and cannot pay you.
Liquidity Risk: You cannot easily "sell" a forward contract to a third party. You usually have to negotiate a cancellation or enter an offsetting contract with the same counterparty.
Frequently Asked Questions
Common questions about Forward Valuation
Why is the initial value zero?
In a fair market, the Delivery Price K is set to equal the theoretical forward price at inception. Therefore, value = Spot - PV(Forward) = 0. No money changes hands at the start.
Does "Mark-to-Market" apply to forwards?
For accounting purposes, yes. Companies must value their open forward positions at current market rates for financial reporting. However, cash is not settled daily like in Futures (unless a Credit Support Annex requires collateral posting).
What is the "Delivery Price"?
The Delivery Price (K) is the fixed price you agreed to pay (if Long) or receive (if Short) for the asset at the contract's maturity. This is fixed for the life of the contract.
How do dividends affect the value?
Dividends reduce the holding cost of the asset. If a stock pays a dividend, the spot price is expected to drop by that amount. Therefore, expected dividends reduce the "Spot PV" component, lowering the value of a Long Forward.
What happens if interest rates become negative?
If rates are negative, the Present Value of K becomes larger than K itself. This reverses the usual interest rate sensitivity dynamics.
Can I exit a forward contract early?
Not easily. You generally have to pay the current "Value" of the contract to the counterparty to terminate it. If the value is negative (loss), you pay them. If positive, they pay you.
What is an NDF (Non-Deliverable Forward)?
An NDF is a forward contract where no physical delivery takes place. Instead, at maturity, the difference between the Spot Price and the Delivery Price is settled in cash (usually in USD). NDFs are common for currencies with capital controls.
Is Forward Value the same as Forward Price?
No! The Forward Price is the market rate for a new contract today. The Forward Value is the profit/loss on your existing contract relative to that new market rate.
How does time decay work for forwards?
Unlike options, forwards don't have "time value" in the same sense. However, the discounting effect diminishes as time passes. Assuming spot remains flat, the value of the contract will drift slightly as the interest rate discounting unwinds.
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Compute current mark-to-market value of a forward contract from spot, forward price, rate, and time.
How to use Forward Contract Value Calculator
Step-by-step guide to using the Forward Contract Value Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
Review results. Review the calculated results and any additional information provided
Frequently asked questions
How do I use the Forward Contract Value Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Forward Contract Value Calculator is designed to be user-friendly and provide instant calculations.
Is the Forward Contract Value Calculator free to use?
Yes, the Forward Contract Value Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the Forward Contract Value Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Forward Contract Value Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.