Long Dated Forward

Categories: Derivatives

A futures contract deals with...well, the future. Like...going forward in time. Hence, one of these deals also gets called “a forward.”

A long-dated forward involves a futures contract expiring well down the road. Not quite in the time of warp drives and robot consciousness. But a long time in the future, relative to most forwards. Typically, we’re talking at least a year, but maybe as far as a decade.

It comes up a lot in currency markets, often as a hedge.

You're planning on doing a lot of business in the UK over the next few years. You're worried about how changes in the pound might impact your bottom line, especially as things get murky further out in time. So you set a long-dated forward, locking in a pound-to-dollar exchange rate of 1.3 five years from now.

Now, you can sleep easy (at least on the currency front), knowing you don't have to worry about the pound spiking in value and ruining your plans.

Related or Semi-related Video

Finance: What is Forward Pricing?12 Views

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Finance a la shmoop what is forward pricing?

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well open-ended mutual funds trade the shares within them all day long buy

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orders sell orders that stuff but the price of a given share of that mutual [Mutual funds appear with share price]

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fund does not in fact change every second of the trading day like the

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shares do inside of it like its NAV price does not suddenly change every

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minute too many complexities and too many

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moving parts derived from a free computer in every bathroom era when

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manual labor had to add numbers and figure out totals we just can't operate [Person jotting down numbers]

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funds such that they adjust every second of the day especially when the larger

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mutual funds can have literally thousands of investments in them well

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the price of a share of a mutual fund is its net asset value and is derived by

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adding up all the bid prices offered to buy a given security and then adding in

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cash and accounting for any other special holdings like a private

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company's not yet public and then taking a discount to them that's fair because

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there's more risk when they're not public and traded in the market setting

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a price on them every minute right all right and then once you have all that

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totaled you divide by the number of shares outstanding of the mutual funds [NAV formula appears]

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so if you put in an order at 10:37 a.m. to buy a thousand shares of a given [Man checks watch]

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mutual fund the seller can't actually give you an exact price that's how you

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want to buy that fund the close yesterday was $11.87 share in the market

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today is flattish so it's highly likely that at the close of this day well the

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price will be about 11.87 but who knows it might be eleven eighty nine it might

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be eleven eighty four or somewhere else in that neighborhood so the fund has to

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give you forward pricing such that you commit well about a thousand times about

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11.87 or 11,870 dollars to buy

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these thousand mutual fund shares but you won't get the exact total or bill I

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guess until the market is closed and the totals have been you know totaled and [Bell rings and clock strikes 4pm]

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then at that point you can become the proud new owner of a thousand shares of

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the feeling is mutual fund so this situation revolves around the exact

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act number of mutual funds shares method of buying meaning you want a thousand

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shares of the mutual fund you want to pay $11.87 and you pay 11,870

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dollars for the privilege okay [Man discussing purchasing of mutual fund]

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the much more common way of buying shares in a mutual fund company is to

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buy fractional shares and simply commit a dollar amount that's about what you

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want to invest in the mutual fund like let's say you had about 12 grand that

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you wanted to invest and that's it 12 grand so on that day you're actually

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rooting for the NAV to go down the day that you actually buy the fund [Girl celebrating for NAV to decrease]

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well why would you root for it to go down? well you don't own it yet if it

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goes down you get the same shares cheaper right because the more it falls

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the higher the number of shares at NAV of that mutual fund you're buying with

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your 12 grand so if the nav closes at 11.87 and you're buying 12

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grand worth well then you get twelve thousand dollars divided by 11.87

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or one 1,011 shares right and there gets to be

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fractionals in there as well if you really want to get technical that's [Man discussing fractionals]

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forward pricing not to be confused with fast forward pricing which requires the

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use of a remote control and two double-a batteries [Remote control and batteries appear]

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