Chapter 23. Forward and Futures Contracts. Innovative Financial Instruments. Dr. A. DeMaskey. An Overview of Forward and Futures Trading. Forward contracts are negotiated directly between two parties in the OTC markets. Individually designed to meet specific needs Subject to default risk
Net profit of short hedge position:
Variance of this value:
Minimizing and solving for N:
The value of unwinding a forward position early:
The value of a futures, which are marked-to-market is:
* = the possibility that forward and futures prices for the same commodity at the same point in time might be different.