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IBBC CAPITAL ACADEMY / 2027

Forward prices at inception and values later

Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.

Learning goals

  • Explain price versus value using mechanisms and limitations.
  • Explain midlife valuation using mechanisms and limitations.
  • Explain rate commitments using mechanisms and limitations.

Draft · approximately 25 minutes, excluding further revision.

Price versus value

A fairly initiated forward typically has zero market value with a delivery price fixed in the contract; zero value does not mean zero notional or exposure.

As markets change, the original delivery price stays fixed while a new fair forward price moves; value is the present value of the delivery-price difference.

Midlife valuation

For a long forward on a no-income asset, value can be expressed as current spot minus the present value of contracted delivery payment under matched carry assumptions.

At maturity the long payoff is spot minus delivery price and short payoff is the opposite; signs must follow the contractual position.

Rate commitments

Forward interest rates imply a borrowing or lending rate between future dates from today’s discount factors; the notional is usually a scale factor rather than exchanged principal.

FRA settlement timing and discounting depend on conventions, so distinguish end-period interest differences from their earlier settlement value.

Formula and assumptions

Long forward value=DF(t,T)×[Ft(T)−K]

Original applied case: Forward prices at inception and values later

  1. A long forward has delivery price 105; at a date one year before delivery, a new forward price is 110 and discount rate 5%.
  2. Value=(110−105)/1.05=4.7619 to the long.
  3. The original contractual price remains 105; positive value is not a reset of that price.

Errors to catch

  • Do not assume: Zero initial value means a forward has no risk.
  • Do not assume: Existing delivery prices automatically reset with spot every day.
  • Do not assume: A long forward value always equals the full spot price.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.