Forward Price Law and Legal Definition
The forward price is the agreed upon price of an asset in a forward contract. Forward Contractor is a privately negotiated non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. Using the rational pricing assumption, one can express the forward price in terms of the spot price and any dividends etc., so that there is no possibility for arbitrage.
The forward price makes the forward contract have no value when the contract is written. However, if the value of the underlying commodity changes, the value of the forward contract becomes positive or negative, depending on the position held. Forwards are priced in a manner similar to futures. Like in the case of a futures contract, the first step in pricing a forward is to add the spot price to the cost of carry. Unlike a futures contract, the price may also include a premium for counterparty credit risk, and the fact that there is not daily marking to market process to minimize default risk. If there is no allowance for these credit risks, then the forward price will equal the futures price.
