Forward Price

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Related to Forward rates: Forward exchange rates

Forward Price

The agreed upon price of the underlying asset in a forward contract. When a forward contract is made, the parties agree to buy/sell the underlying at a certain point in the future at a certain price. The price is negotiated directly between the parties, unlike a futures contract, which trades on an exchange. Partly because there is little secondary market for forward contracts, determining the forward price is a zero-sum game: one party will gain on the contract and one will lose.
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After having knowledge of the forward rates curve of Diebold and Li (2006), the spot rate for a zero-coupon with expiration in Tau can be determined as the weighted average of the forward rates, and in this point we do the following derivation based on the original work.
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When researchers tested for cointegration between spot and forward rates they found [s.sub.t+1] and [f.sub.t] to be cointegrated for almost every currency and time period studied, e.g., Baillie and Bollerslew, (14) Hakkio & Rush and Copeland.
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