Talk:Forward contract
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Merger
editThe forward price is also relevant in other financial instruments than forward contracts. Therefore I suggest to keep it separately. --193.108.157.68 13:32, 30 January 2006 (UTC)
I agree
I find it appropriate to have a link to a "forward price" page from within pages dedicated to various financial instruments or financial/quantitative valuation models. It could be confusing to have to read a page dedicated to "forward contracts" if one is only looking for information on the concept and uses of forward prices.
-- It would be helpful if it were made explicit how a forward differs from a future. LeoTrottier 00:47, 7 August 2006 (UTC) --
It has been up for merger for about a year now. The general discussion has leaned towards keeping them seperate, so I am going to just go ahead and remove the tags. -Warhorus 07:16, 25 December 2006 (UTC)
With absolutely no intention to offend any person, let me just make a point that the article here is an absolute cracker for a layman like me who wishes to understand trading and its terms of usage. I believe the structuring as well as the mathematical interpretations in this article need to be jargon busted and elaborated appropriately for better understanding. I appreciate the explanations given through illustrations about "Bob" the house buyer. Similar wording and simplicity would be much more appreciated. Just a thought.
--Theruvath Prasanth Mathew 06:08, 1 July 2006 (UTC)
I made some changes to the generalized pricing formula that I think are easier to understand, somebody verify that its correct. I'm not good at the wiki format so some help would be nice making it look good. Thanks.
- There is a distinct reason why adults with mathematical skillsets and little else are commensurate to infants using cellphones... Hopefully, a younger generation can discern the logical problems inherent in the depths of unrealized "nothingness" or the invisible "maximization" that these equations uphold as their objective. Ultimately, the root of the economic system's global demise, is the lack of validity in successful "failure"... Stevenmitchell (talk) 12:37, 3 November 2011 (UTC)
I do feel that since we have started talking on the subject of forward contract we are supposed to be familiar with calculation of forward rates of which I failed to find any kind of information in the entry. To provide a better understanding of a term some simplified and laymen-close examples are to be inserted. Through reflective examples and exhaustive detailed explanations attached to them can we gain more sufficient expertise with respect to the matter. —Preceding unsigned comment added by Yurko2006 (talk • contribs) 20:53, 1 November 2007 (UTC)
Not an example, Misinformed - feel free to try again when you understand it
editI removed the following - there might be something here, but it's hard to tell
- You are to be commended in your thoughtfulness for leaving the below here. However, I still hold the opinion that editing the paragraph (even if you just modified it as suspect) would have been better. Okay, mea culpa on my part for not having the quote, but I provide it below, yet I did point to a potential reference. In the normal wiki mode, I expected the next person to take the matter further. So, I'll just wait a little to see who wants to step forward.
- By the way, what better way is there than 'forwards' to stay 'virtual' and avoid attention? jmswtlk (talk) 14:19, 1 February 2008 (UTC)
Example of how forward contracts can be mis-used
editThe forward contract relies upon a type of gentleman's agreement and may not precipitate the type of transactional activity that can bring immediate scrutiny. On January 24, 2008, the Société Générale reported a loss through unauthorized trading and alleged that Jérôme Kerviel covered his mis-use of arbitrage authority with fictional trades via forward contracts. News sources describe that these 'fictional' transactions were closely timed by Jérôme to the audit schedule of the bank thereby allowing a period of over 14 months to occur without any direct observations, though various clerical reviews did generate questions about the activity. Evidently, in this case, the forward activity provided the balance against the 'real' activity that is favored in hedge practices thereby avoiding one possible audit trigger.
- I think the idea here is that money does not change hands on the day when two parties enter into a forward contract. There is some risk that your counterparty may not honor the contract during settlement. I don't know if this has anything to do with the Société Générale incident. Finnancier (talk) 13:09, 1 February 2008 (UTC)
- Thanks for the offhanded support. Here is one quote and source: Rogue no high-flyer "The fake trades in the second portfolio were fake trades with actual banks or clients. Rather than betting on futures with an exchange - a move that would trigger money flow and would have left trails - Kerviel used forward transactions, which often don't require actual cash to exchange hands."
- Now, wiki (with its talk) is not a forum. But, the fact that some of these 'modern' techniques are problematic needs to be clear. Look at the derivative page, for instance. As well, the news and other pages that reference this event ought to be updated with techniques used as we learn more. jmswtlk (talk) 14:19, 1 February 2008 (UTC)
- There is room for a section on the risks of forward contracts. In fact, a lengthy discussion on the difference between futures and forwards already exists on the Futures contract page. However, I'm not sure that the SocGen example is particularly relevant. Large, well-established institutional investors routinely use over-the-counter forwards rather than exchange-traded futures because they offer more flexibility in terms of contract size, dates, etc. Such flexibility would be needed for hedging flows of funds that may come in different sizes or on different dates. It wouldn't have been unusual at all for Kerviel to be using forwards rather than futures. Then again, I have trouble coming up with another instrument that wouldn't trigger any cash flows until settlement. Finnancier (talk) 14:46, 1 February 2008 (UTC)
- The problem is not "no cash flows," it was all the other misunderstandings - "Gentleman's agreement" - no a forward is a legal contract; no "transactional activity" - there certainly must be paperwork attached to forward contracts, i.e. at least a formal "trade confirmation." Perhaps the real scandal here is that SocGen couldn't keep track of the trade confirmations. There might also be problems with credit lines - banks maintain formal limits on the position they maintain with each other (and these have to be checked daily). Undoubtably these credit limits are quite large between 2 major banks, but the futures position was quite large - so the "offsetting positions" would also have to be quite large.
- The transactional cash flows that would "blow the whistle" would most likely be daily "mark-to-market margin calls" not the "initial margins." Also forwards are not a modern invention - they predate futures. In their modern form they go back to at least the 1870's, but really they probably go back as far as there are recorded contracts (some people say Joseph with his grain stores in the Bible - but they are stretching it a bit.) Smallbones (talk) 15:03, 1 February 2008 (UTC)
Example could be improved
editUnfortunately, the current example makes some silly mistakes. First off, it considers the opportunity cost of the cash but not the opportunity cost of the asset (the house for sale), which could be rented out between the time of the contract and the settlement. Furthermore, claims like "for the contract to be worthwhile for him" ignore the fact that he is locking in a sale price which could otherwise 'fall'. --MattiasAndersson (talk) 05:20, 22 January 2009 (UTC)
- About the opportunity cost of the asset: I believe that the guy can still rent out the house between the contract time and the settlement time. No? What I understand you want to talk about is the case when the guy has to make a decision between
- renting out the house
- using the house as a chocolate factory (investment project)
- In this case, the guy has to consider that renting out the house is an opportunity cost (a possible income foregone for the sake of the investment)
- --Shadiakiki1986 (talk) 20:51, 10 February 2010 (UTC)
notional amount
editIn the notional amounts example, the exchange rates from US to CAD seem backward to recent normal values.
future value versus present usufruct
editThe idea that the house should fetch 4% interest if the money is received only in the future ignores the fact that he will be living in the house during the whole year. Therefore, this is not a question of interest on foregone investment (as he would have if he sold the house now, and could invest the money), and merely a projection of future real-estate values. — Preceding unsigned comment added by 200.233.63.158 (talk) 20:09, 24 August 2011 (UTC)