Equity Forward Contract In Kings
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FAQ
A forward rate agreement (FRA) is a forward contract on interest rates. The FRA's fixed interest rate is determined such that the initial value of the FRA is zero. Receive-fixed (Short): NA × {FRA0 – Lm tm}/1 + Dmtm.
A forward contract is a special type of derivative, and just like any other derivative, the value of a forward contract is tied to its underlying asset. Common forward contract assets include commodities and currencies, but even indexes and stocks can be underlying assets for these contracts.
Record a forward contract on the contract date on the balance sheet from the seller's perspective. On the liability side of the equation, you would credit the Asset Obligation for the spot rate. Then, on the asset side of the equation, you would debit the Asset Receivable for the forward rate.
Record a forward contract on the contract date on the balance sheet from the seller's perspective. On the liability side of the equation, you would credit the Asset Obligation for the spot rate. Then, on the asset side of the equation, you would debit the Asset Receivable for the forward rate.
Today, forward contracts can be for any commodity, in any amount, and delivered at any time. Due to the customization of these products they are traded over-the-counter (OTC) or off-exchange. These types of contracts are not centrally cleared and therefore have a higher rate of default risk.
Forward Contracts can broadly be classified as 'Fixed Date Forward Contracts' and 'Option Forward Contracts'. In Fixed Date Forward Contracts, the buying/selling of foreign exchange takes place at a specified future date i.e. a fixed maturity date.
Forward Contract Pros and Cons ProsCons Lock in a beneficial exchange rate for a future date Forward Contracts are binding and cannot be terminated Protection from adverse exchange rate fluctuations Could miss out on advantageous exchange rate movements1 more row •