How to calculate Forward Price

 

Some people attach significance to whether the forward price is higher than the spot price. It is important to note that the forward price should not be interpreted as a forecast of the future price of the underlying. This misconception is common. If the forward price is higher than the spot price, it merely indicates that the effect of the risk-free rate is greater than the effect of the dividends. In fact, such is usually the case with equity forwards. Interest rates are usually greater than dividend yields.

In the case of bonds, we will replace the dividends with coupons. The forward price calculated is the theoretical price we expect to be available in the market.

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