Question

Why is the value of a futures or forward contract at the time it is purchased equal to zero? Contrast this with the value of the corresponding spot commodity.

Answer 1

Forward price is the predetermined delivery price for an underlying commodity, currency, or financial asset as decided by the buyer and the seller of the forward contract, to be paid at a predetermined date in the future.

F0​=S0​×erT​

At the initiation date , the value of the forward contract is zero, as it is still dependent on the present underlying asset price. As we move along the maturity, the value of the forward may increase or decrease, depending on the movement of underlying asset price from the date of initiation. If suppose on date of inititation underlying asset price is 100 and it moves to 120 after 30 days, forward price will also move similarly and likewise the value of the forward will then move upwards.

As explained in the above formula, the difference between the underlying spot commodity price and forward price is the time value of the money (Interest for the period). It is interest which is added to the spot price to find the forward price.