Valuation of Forward Vs Future market

[Anuja]

Like Mark to Market is the tool which provides realistic estimate of a financial situation for Future market transaction..
What is the tool used for arriving the current value of forward market transaction..

 

[David Harper CFA FRM]

Hi @Anuja For the theoretical pricing of a forward contract, the FRM follows John Hull's Chapter 5 and employs the cost of carry (COC) model, which is essentially F(0) = S(0)*exp(c*T) where c = the cost of carry; e.g., c = riskless rate for an investment commodity, or maybe (r+ u - y) for a consumption commodity so that storage cost (u) and convenience yield (y) are accounted for. Effectively, benefits to ownership (namely, income or convenience) decrease the theoretical forward price, while costs of ownership (namely, financing via the riskless rate or storage) duly increase the price. The contract's value, f, is a function of the dynamic price, F(0), and the fixed delivery price, K: f = [F(0) - K]*exp(-rt); i.e., the future gain expected on realization of F(0), discounted to the present value. We just produced a new video on this at https://learn.bionicturtle.com/topic/instructional-video-hull-chapter-5/ and the associated learning spreadsheet (https://learn.bionicturtle.com/topic/learning-spreadsheet-hull-chapters-1-2-3-4-5-6-7-10-11-12-26/) illustrates all of Hull's example. I hope that's helpful!