Updated for the 2026-2027 CFA® Level I curriculum.
A forward contract has two numbers that candidates often mix up: its price and its value. The forward price is the delivery price locked in when the contract starts. The value is what the contract is worth to each side as time passes and the spot price moves. CFA Level I asks you to calculate both, at initiation, during the contract, and at expiration.
Quick Answer
The forward price is the delivery price fixed at initiation, calculated as for a simple underlying with no income or storage costs. The delivery price locked into the existing forward contract does not change during the contract. The forward value starts at zero for both parties and then moves as the spot price changes relative to the locked forward price. At expiration, the long's value equals the spot price minus the forward price.
Key Takeaways About Forward Contract Pricing and Valuation
Forward price is fixed at initiation and stays the same for the life of the contract.
Forward value starts at zero and changes as the spot price moves.
For a simple non-income asset, .
Value to the long during the contract: .
At expiration, value to the long equals , which is also the long's payoff.
The short's value at any point is the mirror image of the long's value.
A frequent error is discounting the forward price using the original time to expiration instead of the remaining time.
What You Need to Know for CFA Level I
Explain why forward price and forward value are not interchangeable terms.
Explain why a newly initiated forward contract has zero value to both counterparties.
Calculate the forward price for a simple underlying using the cost of carry relationship.
Calculate the value of a forward position during the contract's life using the remaining time to expiration.
Calculate value and payoff at expiration.
Apply correct signs: the long gains when the spot price rises above the forward price, and the short gains when it falls below.
Forward Price vs Forward Value
These two terms describe different things, and CFA questions test the distinction directly.
Term | Definition | Changes during the contract? |
|---|---|---|
Forward price | The delivery price both parties agree to at initiation | No |
Forward value | The worth of the contract position to one party | Yes |
The forward price is written into the contract. It does not move once the contract is signed. The forward value moves because the spot price of the underlying keeps changing while the delivery price stays fixed.
Forward Contract at Initiation
At initiation, the forward price for a simple underlying asset with no income or storage cost is set using the cost of carry relationship:
Where:
= forward price agreed today for delivery at time
= spot price of the underlying today
= spot price of the underlying at expiration
= risk-free rate (annual)
= time to expiration, in years
This price reflects the cost of buying the asset today and carrying it to time using borrowed funds at the risk-free rate. Because the forward price is built directly from the current spot price and the cost of carry, neither party pays anything extra to enter the contract. The value of a forward contract at initiation is zero:
This is a key reason exam questions test initiation separately from later valuation. A forward is not like a stock or bond purchase that requires an upfront outlay. Both sides simply agree to transact later at a price that is already fair given today's information.
Forward Contract During Its Life
Once the contract exists, the forward price stays fixed at , but the spot price keeps moving. This creates a value that is no longer zero.
The value to the long at any time t before expiration is:
Where:
= spot price of the underlying at time t
= the remaining time to expiration, not the original time to maturity
This formula compares the current spot price to the present value of the locked forward price, discounted only over the time still remaining. Using the original T instead of the remaining time is a common and avoidable error.
Forward Contract at Expiration
At expiration, , so there is no time left to discount. The value formula simplifies to:
This is also the long's payoff on the contract. The long profits when the spot price at expiration is above the locked forward price. The long loses when it settles below.
Long vs Short Forward Value
The short side of the contract holds the opposite position. Its value is always the negative of the long's value.
Party | Value at expiration |
|---|---|
Long | |
Short |
If the underlying rises above the forward price, the long gains and the short loses by the same amount. If it falls below the forward price, the relationship reverses.
Forward Pricing and Valuation Timeline
Three moments matter for this LOS: initiation, the interim period, and expiration. At initiation, the forward price is set and the value is zero. During the contract, the forward price stays fixed while the value moves with the spot price. At expiration, the value equals the final payoff.
Worked Example
Setup. An investor enters a one-year forward contract on a non-dividend-paying stock. The spot price today is $50. The risk-free rate is 4%, with annual compounding. Six months later, the spot price rises to $53. At expiration, the spot price is $55. Calculate the forward price and the value to the long at each date.
Step 1: Forward price at initiation
Step 2: Value at initiation
The contract has zero value to either party at the start, as expected.
Step 3: Value at the six-month mark ,
Step 4: Value at expiration
The forward price never changes from $52.
As the spot price climbs from $50 to $53 to $55, the value to the long climbs with it, from $0 to $2.02 to $3.00. The short's value moves in the opposite direction at each point.
Common Exam Traps
Confusing forward price with forward value
The forward price is fixed once the contract starts. The forward value changes constantly. A question that asks for "the value of the contract today" is never asking for after initiation.
Assuming the contract keeps zero value after initiation
Zero value applies only at . Once the spot price moves, the value moves away from zero immediately.
Discounting with the wrong time period. The valuation formula discounts over the remaining time to expiration, , not the original contract length . Using the original overstates or understates the present value of the locked price.
Reversing the long and short signs. The long gains when the spot price is above the forward price at expiration. The short gains when it is below. Mixing these up flips the entire answer.
Practice Questions
A two-year forward contract on a non-dividend-paying asset is initiated when the spot price is $60. The risk-free rate is 5% annually, with annual compounding. One year later, the spot price is $67. What is the value of the forward contract to the long position at this point?
$0.85
$4.00
$7.00
Correct Answer: B
Reasoning:
Forward price at initiation:
Remaining time at valuation date:
Value to the long:
Option A: Uses without discounting the forward price at all (67 − 66.15 = 0.85), skipping the required discounting step.
Option C: Discounts using the original two-year term instead of the one-year remaining term (66.15 / 1.1025 = 60.00, then 67 − 60 = 7.00).
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FAQs About Forward Contract Pricing and Valuation
Is the forward price the same as the value of a forward contract?
No. The forward price is the fixed delivery price agreed to at initiation. The value is what the position is worth to a party at a given point in time, and it changes as the spot price moves.
Why does a forward contract start with zero value?
Because the forward price is calculated from the current spot price and the cost of carry. Neither party pays a premium to enter the contract, so the position is fair to both sides at t = 0.
How do you find the value of a forward contract before expiration?
Take the current spot price and subtract the present value of the locked forward price, discounted only over the time remaining until expiration, not the original contract length.