What is the forward price?
The pre -sale price concerns the price agreed by the seller and the buyer of assets, such as shares, commodity or currency, for a transaction that will take place in the future in the future. Both parties in the handover agreement are negotiating the conditions privately and sign a contract without passing through the stock exchange. When signing the forward contract, no money does not change your hands. Therefore, the forward price must be at least the current price of the asset plus interest that it would accumulate if it was deployed in a risk -free investment vehicle such as a bank savings account or deadline. This standard is derived from the idea that for buyers by buying an asset now at the current price without initial expenses, the buyer must take a loan and pay interest.
The more pre -sale price must also take into account the seller's costs concerning the costs and benefits of maintaining and storing the asset. In the case of commodities such as gold, the buyer must compensate the seller for storage costs. Transfer costs can also be negative, which meansthat the seller benefits from maintaining the asset. For example, the seller could gain interest on currency, earn dividends from shares or be protected from a shortage in the case of oil or other fuels.
Signing a forward contract means entering a zero -sum game where the amount of money is always the same. For example, if the transfer price is $ 50 and the market price will prove to be $ 55 USD on the date specified, the seller must provide an item for $ 50. In this case, the seller loses $ 5 USD, which is the same amount of money as the buyer basically wins.
Investors and speculators can use forward contracts to benefit from price fluctuations. Forward contracts can also help a person or fixed security risks that come from price fluctuations. For example, a multinational company, which is concerned about the fluctuations of exchange courses, can take advantage of the exchange of exchange rate and protect against adverse fluctuations. It will not benefit from favorable swings of exchange courses,But it should not be the focus of the company whose main trade is not speculation with the exchange rate.