Forward

The forward rate agreement (FRA) is a contract that specifies the underlying to be exchanged for a specified price at a future date. One party takes the long position (will buy the underlying), the other the short position (will sell the underlying).

FRAs are traded in the OTC (over-the-counter) market. Therefore, they exhibit an increased counter party risk on default. This is the main difference to a futures contract.

The payoff of a long forward contract is: $S_T - K$ where S_T is the spot price of the underlying at time T and K is the delivery price. For the short position the sign changes.

Value of a long forward contract: $f = S_0 e^{-qT} - K e^{-rT}$ where S0, q, T, K, and r are asset price, dividend yield, time to maturity, delivery price, and risk-free rate.