8.29.2005

Q&A: If a forward contract is an obligation...

...as opposed to a right, to buy/sell, can one get out of it prior to expiration?

Not directly. One could, however, enter into an opposite transaction with the same or a different counterparty (with additonal credit risk). For example, if a party goes long in the original transaction, he can terminate his long position by going short in the new forward contract. aka offsetting.

Other things to know about forwards

  • no money changes hands at the start.
  • mostly cash settled (ie. index forwards), as opposed to physical delivery.
  • common types include Equity forward (contract prices and values must take into account the fact that the underlying stock, portfolio, or index could pay dividends), bond forwards, currency forward (manage foreign exchange risk), and interest rate forwards (ie FRA).

Category: C++ Quant > Derivatives > Forward

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