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Long receives the asset, Short delivers the asset
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Market price of the asset at expiration
$
Contract price from original agreement
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Number of units in the contract
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Understanding Forward Value

  • Long Position: V = ST - K (profit when spot rises)
  • Short Position: V = K - ST (profit when spot falls)
  • Zero-Sum: Long's gain = Short's loss
  • At Initiation: K is set so initial value = 0

Forward Value at Expiration

Value per Unit +$5.00 Small Profit Modest gain on the forward position
Total Contract Value +$5.00
Value as % of K +4.76%

Formula Breakdown

VT(T) = ST - K

Understanding the Result

What This Means

At expiration, the forward contract's value equals the difference between the spot price and the delivery price. A positive value means profit for the long position (loss for short), while negative means loss for long (profit for short).

Settlement

Forwards can settle via physical delivery (exchange of asset for cash) or cash settlement (payment of the net value). Either way, the economic result is the same: VT = ST - K for long positions.

Value Interpretation Guide

Value as % of K Result Interpretation
> 10% Large Profit Significant favorable move
5% to 10% Moderate Profit Good return on position
0% to 5% Small Profit Modest gain
-5% to 0% Small Loss Minor adverse move
< -5% Large Loss Significant adverse move

Understanding Forward Contract Value at Expiration

What is Forward Contract Value at Expiration?

At expiration, a forward contract's value is simply the difference between the current spot price (ST) and the delivery price (K) agreed upon when the contract was initiated. This is the payoff or terminal value of the forward contract.

Forward Value at Expiration
VT = ST - K
Key Insight: Forward contracts are zero-sum games. The long position's gain exactly equals the short position's loss, and vice versa. The total value across both positions always sums to zero.

Long vs. Short Positions

Long Forward

Agrees to BUY the asset at delivery price K. Value: VT = ST - K. Profits when spot rises above K.

Short Forward

Agrees to SELL the asset at delivery price K. Value: VT = K - ST. Profits when spot falls below K.

At contract initiation, K is set so that the forward has zero initial value to both parties. K is typically the forward price F₀(T) = S₀ × (1+r)T based on the cost of carry model.

Settlement Methods

Forward contracts can be settled in two ways, both economically equivalent:

  • Physical Delivery: The short delivers the asset, long pays K. If ST > K, long receives an asset worth more than they paid.
  • Cash Settlement: The party with negative value pays the absolute value to the other party. No asset changes hands.
Caution: Unlike exchange-traded futures, forwards typically have no daily mark-to-market and carry counterparty credit risk. The losing party must be able to pay at expiration.

Relationship to Forward Pricing

  • At initiation (t=0): K is set equal to the forward price F₀(T), making initial value = 0
  • Before expiration: Value depends on current forward price vs. delivery price (discounted)
  • At expiration (t=T): Value is simply ST - K (no discounting needed)

Frequently Asked Questions

At expiration, a forward contract's value is the difference between the spot price (ST) and the delivery price (K). For long positions: V = ST - K. For short positions: V = K - ST. This represents the profit or loss on the position, also called the payoff or terminal value.

Long positions profit when the spot price exceeds the delivery price (ST > K), while short positions profit when the delivery price exceeds spot (K > ST). The two positions are mirror images: if long gains $5, short loses $5. This zero-sum nature is fundamental to forward contracts.

When ST > K, the long position holder can buy the asset at K (the agreed delivery price) when it's worth ST in the market. They profit by the difference (ST - K). Conversely, the short must sell at K when they could get ST in the market, losing (ST - K).

At expiration, yes - the forward contract value equals the profit or loss. Before expiration, the mark-to-market value represents unrealized P&L. Note that forward contracts typically have zero initial value (no premium paid), so the terminal value is the entire profit or loss.

Total contract value = Value per unit × Contract size. If the value per unit is $5 and you have a contract for 100 units, total value is $500. Contract size scales both profits and losses proportionally without affecting the per-unit economics.

Forward contracts can settle via physical delivery (actual exchange of asset for payment K) or cash settlement (payment of the net value). Both methods produce the same economic result. Physical delivery: long pays K, receives asset worth ST, net gain = ST - K. Cash settlement: long receives ST - K directly.
Disclaimer

This calculator is for educational purposes only and does not constitute financial advice. Forward contracts involve significant risk, including counterparty credit risk. Always consult with a qualified financial advisor before entering derivative contracts.

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