Why a Forward Contract Starts With Zero Value

Summary

The document asks why a forward price is chosen so that a newly signed contract has zero value, and whether the explanation comes from no-arbitrage or from both parties being indifferent between taking the long and short sides. It also asks why the parties could not agree on a forward price and add an upfront payment to compensate one side.

It presents these as questions rather than supplying a derivation, example, or evidence. The central concept is the distinction between a contract’s delivery price and its value at inception: a zero-value convention avoids an initial exchange of cash when the forward price is set to the market-consistent level. An upfront payment could accompany a different delivery price, but that changes the contract’s initial value and its terms. The document does not develop the pricing assumptions or explain how the forward price is calculated, so it is a prompt for further study rather than a complete treatment.

Key ideas

• A forward is commonly priced so its value at inception is zero.
• The document asks how this convention relates to no-arbitrage and the parties’ willingness to take opposite positions.
• An upfront payment could be paired with a different delivery price, creating a nonzero initial contract value.
• The document raises the pricing question but does not provide a derivation or worked example.

Tags

# Why is the forward price set to make the value of the forward contract to 0 when it is signed?


# Why is the forward price set to make the value of the forward contract to 0 when it is signed?












When I study the forward contract, I read that the forward price must be the price that makes the the value of the contract zero.

I searched for the answer, but there are many versions.

Some say it is because the assumption that the information is available to all, so the buyers and the sellers must be indifferent of whether long or short the contract.

Some say it is because of the no-arbitrage principle. But I still cannot fully understand it.

Why cannot two people sign a forward contract, one pays another some money while setting the forward price?

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