Rates Equities and Portfolio Forwards · Forwards Trading Guide

An equity forward combines share exposure with financing and expected distributions. It does not automatically provide the rights of holding the shares today.

Identify the share exposure

An equity forward can commit a buyer to acquire a number of shares later or settle a cash difference. Before delivery, the buyer usually does not hold those shares through the forward itself. Voting rights, dividends and corporate actions must be addressed by the documentation. A total return swap, option or leveraged retail product is not interchangeable with a plain equity forward.

Include known cash income

Suppose a share costs $50 and will pay a known $1 dividend in three months, before a six month forward matures. Under a simplified model with simple 4% annual funding, the dividend’s present value is $1 ÷ 1.01. Subtracting that from $50 and carrying the result for six months gives approximately $49.9901 as the theoretical forward price. The dividend lowers the forward relative to a share with no income.

Check what is uncertain

A dividend forecast is not a guaranteed payment unless the relevant facts make it known for the model. Stock splits, special distributions, takeovers and trading suspensions can require contractual adjustments. Borrow availability and financing costs also affect executable pricing. A textbook fair price assumes access to a replicating trade that a customer may not actually have.

Calculate the contractual outcome

For a simple cash settled long covering 1,000 shares at $52, a maturity reference of $56 produces $4,000 before costs. A reference of $48 creates a $4,000 payment. Physical delivery instead requires the agreed purchase amount for the shares. Assess gross funding, collateral and concentration alongside the price view rather than treating the absence of an initial option premium as limited risk.

Try it yourself

A long cash settled forward covers 600 shares at $40. The reference at maturity is $37. What is the settlement result?

Show the worked answer

A $1,800 payment by the long, calculated as 600 × ($37 minus $40). The loss is not capped by any initial collateral amount.

Further reading

Educational material. Numerical examples are hypothetical and exclude costs unless stated. Forward contracts create binding obligations and may require collateral or credit approval. Actual terms, access and risks depend on the agreement and jurisdiction.

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