Measuring Daily Performance of a Forward Contract

Summary

The document asks how to calculate daily returns on a forward contract after marking it to market. It gives a present-value expression for the contract, based on the current underlying price, the agreed delivery price, interest rates in both currencies, and time to maturity. The proposed return is the ratio of consecutive contract values minus one.

The central issue is that an at-market forward starts with zero value, so the first-day percentage return is undefined. The document raises this measurement problem but provides no answer or alternative convention. It therefore serves as a question about return denominators rather than a complete method. Any practical performance measure would need to specify a capital or risk base, such as collateral, margin, or notional exposure, and account for contract cash flows; those considerations are not discussed here.

Key ideas

• The document marks a forward contract using spot, the agreed delivery price, interest rates, and remaining maturity.
• It proposes calculating daily returns from consecutive marked values.
• An at-market forward begins at zero value, making the usual first-day percentage return undefined.
• The document poses the problem but does not recommend an alternative performance measure.

Tags

# Forward returns measurment?


# Forward returns measurment?












Is there a common approach to measure how a forward contract is performing?

Here's what I'm thinking, each day you would price your forward with the next formula.

$$ F_t = S_0 e^{-r_f T}-Ke^{-r T} = (S_0 e^{(r-r_f) T}-K)e^{-r T}=(FWD_t -K)e^{-r T} $$

With $K$ being the forward price originally agreed.

Now I'd think a common approach for the daily return would be:

$$ r_t = (\frac{F_{t}}{F_{t-1}}-1) $$

However usually $F_0= 0$, which would create a problem for return of the first day. Is there any other common practice to measure this?

Thanks

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.