Forwards clarification represents, conclusion, situation, long

ba736

When we work out forward values and prices, it's from the perspective of the long position, right?

So, if the price/value of a forward is negative, then this represents a gain to the long, ie. the short paying the long. Right?

Say we are short a forward, though. Am I right in thinking that if the value/price (using the same formulae, from the perspective of the long) is negative, this represents a gain to the short?

Why aren't we just drawing the same conclusion from the first situation. ie. if it's negative then the short pays the long? Why is it reversed when we are short, when all we are doing is taking up the opposite position?

random_walker47

Valuing a forward entails valuing what both sides pay. Then you take what you're receiving and subtract what you're paying to end up with the value to you (i.e. the total amount of the payment and whether you pay or receive. If you are short the forward, it is the same calculations, you just switch the numbers for paying and receiving, or, just realize that when you calculate a long position, the payment for the short is the opposite.

MiniMe7

I think you have it all backwards:

Let us clarify what you are trying to say:

ALL OF THIS APPLIES FOR Traditional Forwards ONLY
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1. All the positions in forwards are from the point of view of the Long. in thart part you are right.
2. If the Value is +ve, it is a GAIN to the LONG -> Short pays the Long.
3. If the Value is -ve it is a GAIN to the SHORT -> Long pays the Short.
4. It is a zero-sum game at all times.
5. Initially when the contract is started - the price set on the forward is such that there is no money exchanged initially.

NOW let us look at a situation of an OFF-MARKET Forward:
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This is the only case of a forward where money is exchanged UP FRONT.
Now say Long and Short priced the forward.
Long had a positive value. But it is OFF-MARKET. So you need to make sure that the value is 0 to start with. In this case - Long pays the Short the value calculated - so Current value = 0.

If Long has a -ve value - and it is OFF-Market - value must again be 0 - so Short pays the Long and makes the Current Value = 0.

CP

President1988

CP, that's kind of how I had it in my head previously, but it's the EOC q's in reading 58 regarding off market forwards that confused me. The first question!

Thanks for your input. Much appreciated!