Financial Markets & Products

A forward is an OTC agreement to buy or sell an asset at a fixed price on a future date, with settlement deferred; a spot transaction settles essentially immediately.

S_T − K. The long gains when the spot price ends above the agreed delivery price.

K − S_T. The short gains when the spot price ends below the delivery price.

Gains and losses move one-for-one with the underlying price in both directions; there is no optionality, so the payoff profile is a straight line.

Hedgers (reduce existing risk exposure), speculators (take a directional bet for profit), and arbitrageurs (lock in riskless profit from price discrepancies).