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Forward Contract Payoff

The gain attained or the loss incurred by the holder of a forward contract at delivery date. In general, the payoff from a long position in a forward contract (long forward contract) on one unit of its underlying asset or commodity is:

Payofflong= ST – K

where: ST is the spot price of the underlying at maturity of the contract K is the delivery price agreed in the contract.

The holder of the long position is obligated to buy the underlying, trading at sport price ST, for the delivery price K.

On the other hand, the payoff from a short position in a forward contract (short forward contract) on one unit of its underlying is:

Payoffshort= K – ST

The holder of the short position is obligated to sell the underlying, trading at sport price ST, for the delivery price K.


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