Brainstorming

Group work

Forward rate
DEFINITION OF 'FORWARD RATE'
A rate applicable to a financial transaction that will take place in the
future
Forward rates are based on the spot rate, adjusted for the cost of carry
and refer to the rate that will be used to deliver a currency, bond or
commodity at some future time.
It may also refer to the rate fixed for a future financial obligation, such as
the interest rate on a loan payment.

Example OF 'FORWARD RATE'

For example, consider an American exporter with a large export order

pending for Europe, and undertakes to sell 10 million euros in exchange
for dollars at a rate of 1.35 euros per U.S. dollar in six months' time
The exporter is obligated to deliver 10 million euros at the specified rate on the
specified date, regardless of the status of the export order or the exchange rate
prevailing in the spot market at that time
Currency forwards can be tailored for specific requirements, unlike futures,
which have fixed contract sizes and expiry dates and therefore cannot be
customized.

Is this rate a measure of future expectations?

In the context of bonds, forward rates are calculated to determine future values

For example, an investor can purchase a one-year Treasury bill or buy a sixmonth bill and roll it into another six-month bill once it matures.
So the investor will be indifferent if they both produce the same result.
The investor will know the spot rate for the six-month bill and the one-year
bond, but he or she will not know the value of a six-month bill that is
purchased six months from now.
Given these two rates though, the forward rate on a six-month bill will be
the rate that equalizes the dollar return between the two types of
investments mentioned earlier.

Future contract
Definition OF Future RATE'
A futures contract is a contract between two parties where both parties agree to
buy and sell a particular asset of specific quantity and at a predetermined price, at
a specified date in future.

The payment and delivery of the asset is made on the future date termed as
delivery date.
The buyer in the futures contract is known as to hold a long position or
simply long.
The seller in the futures contracts is said to be having short position or
simply short.

Since the futures prices are bound to change every day,

the differences in prices are settled on daily basis from the margin.
If the margin is used up, the contractee has to replenish the margin back
in the account.
This process is called marking to market.
Thus, on the day of delivery it is only the spot price that is used to decide
the difference as all other differences had been previously settled.