1. What is Forward Contract Calculation?

Forward Contract Calculation determines the theoretical forward price of an asset using the spot price, interest rate, time to maturity, and expected dividends. It's essential for pricing forward contracts in financial markets.

2. How Does the Calculator Work?

The calculator uses the forward price formula:

Where:

• \( Spot \) — Current spot price of the asset (currency)
• \( r \) — Risk-free interest rate (rate)
• \( t \) — Time to maturity (time)
• \( Dividends \) — Expected dividends during the contract period (currency)

Explanation: The formula accounts for the cost of carry, including interest costs and dividend benefits.

3. Importance of Forward Price Calculation

Details: Accurate forward pricing is crucial for hedging strategies, arbitrage opportunities, and risk management in financial markets.

4. Using the Calculator

Tips: Enter spot price in currency, interest rate as decimal, time in years, and expected dividends in currency. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between forward and futures prices?
A: Forward prices are for customized OTC contracts, while futures prices are for standardized exchange-traded contracts with daily settlement.

Q2: How does interest rate affect forward price?
A: Higher interest rates increase the forward price as they represent the opportunity cost of holding the asset.

Q3: What happens if dividends are higher than expected?
A: Higher dividends decrease the forward price since they represent benefits received from holding the asset.

Q4: Can this formula be used for all types of assets?
A: This formula is primarily for investment assets that pay known dividends. Different formulas apply for consumption assets and currencies.

Q5: How does time to maturity affect forward price?
A: Longer time periods generally result in higher forward prices due to increased carrying costs, assuming positive interest rates.