Pricing and Valuation · Forwards Trading Guide
The rate written in an existing forward stays fixed while its market value changes. A new forward quote is an input to valuation, not a replacement for the old contract.
Keep three numbers separate
Spot is the rate for the applicable near settlement. The current forward rate is the price available now for a specified later date. The delivery price is the fixed rate in your existing agreement. Comparing spot with the old rate before maturity ignores the remaining funding period. For valuation, compare contracts with the same underlying, amount and settlement date.
Use a matching replacement
Suppose an existing long forward buys EUR 100,000 at 1.1000 dollars per euro. A matching forward for its remaining maturity now has a theoretical rate of 1.1200. Combining the old purchase with a matching euro sale produces a $2,000 difference at that maturity. With a dollar discount factor of 0.99, the simple theoretical present value to the original buyer is $1,980.
Understand what the figure is not
The $1,980 is not an additional EUR 100,000 purchase and not necessarily cash available for withdrawal. A dealer’s executable termination amount can differ because of spreads, credit adjustments, collateral terms or fees. Existing collateral transfers must be reconciled separately so that the same economic benefit is not counted twice. The actual settlement instructions remain governed by the agreement.
Keep a valuation record
Save the original rate, remaining date, notional, replacement quote, quote side, discount factor and timestamp. Document whether the value is a midpoint model, an accounting mark or a firm closeout offer. Large changes should be explainable through spot, rates, time or assumptions. If the counterparty’s mark differs materially, compare those inputs before arguing about the final number.
Try it yourself
A long EUR 80,000 forward has a delivery price of 1.1500. The matching current forward is 1.1300 and the USD discount factor is 0.995. What is its simple value?
Show the worked answer
A loss of $1,592, calculated as EUR 80,000 × (1.1300 minus 1.1500) × 0.995. This excludes execution and credit adjustments.
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.
