Enter Values
Key Concepts
- Mark-to-Market: Current value of existing contract
- PV(K): Present value of delivery price obligation
- Long Value: St - PV(K) (benefits from price increases)
- Short Value: PV(K) - St (benefits from price decreases)
Forward Value Results
Formula Breakdown
Mark-to-Market Interpretation
| Scenario | Long Position | Short Position |
|---|---|---|
| St > PV(K) | In-the-Money (+) | Out-of-the-Money (-) |
| St = PV(K) | At-the-Money (0) | At-the-Money (0) |
| St < PV(K) | Out-of-the-Money (-) | In-the-Money (+) |
Understanding Forward Contract Valuation
What is Mark-to-Market Value?
Mark-to-market (MTM) value represents what a forward contract is worth at any point before expiration. Unlike at expiration where value is simply ST - K, before expiration we must account for the time value of the delivery price by discounting K back to present value.
Why Discount the Delivery Price?
The delivery price K won't be paid until maturity. To compare it fairly with today's spot price St, we must calculate its present value: PV(K) = K(1+r)-(T-t). This makes both values comparable at the same point in time.
Long vs. Short Position Formulas
Long Forward
Vt = St - K(1+r)-(T-t). You're entitled to buy at K but can currently sell at St. The value is what you could "lock in" by entering an offsetting short.
Short Forward
Vt = K(1+r)-(T-t) - St. You're obligated to sell at K but must buy at St. Short has opposite value to long - what one gains, the other loses.
Closing Out Positions
The MTM value represents what you'd receive (or pay) to close out your position early. You can offset a long by entering a new short at current forward prices, or vice versa. The net cash flow equals the MTM value.
Frequently Asked Questions
Disclaimer
This calculator is for educational purposes only. Actual forward contract values may differ due to credit risk, liquidity, transaction costs, and market conventions. Consult a qualified professional for trading decisions.
