Ads
related to: forward contract accounting example
Search results
Results From The WOW.Com Content Network
Continuing on the example above, suppose now that the initial price of Alice's house is $100,000 and that Bob enters into a forward contract to buy the house one year from today. But since Alice knows that she can immediately sell for $100,000 and place the proceeds in the bank, she wants to be compensated for the delayed sale.
Any change in the forward rate, however, changes the value of the forward contract. In this example, the exchange rate climbed in both years, increasing the value of the forward contract. Since the derivative instruments are required to be recorded at fair value, these adjustments must be made to the forward contract listed on the books.
A variable prepaid forward contract is an investment strategy that allows a shareholder with a concentrated stock holding to generate liquidity for diversification or other purposes. Additionally, the shareholder will receive cash in hand without paying the capital gains taxes that would apply to a security disposal.
Considering the next payment only, both parties might as well have entered a fixed-for-floating forward contract. For the payment after that another forward contract whose terms are the same, i.e. same notional amount and fixed-for-floating, and so on. The swap contract therefore, can be seen as a series of forward contracts.
In finance, a non-deliverable forward (NDF) is an outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount. It is used in various markets such as foreign exchange and commodities.
A forward rate agreement's (FRA's) effective description is a cash for difference derivative contract, between two parties, benchmarked against an interest rate index. That index is commonly an interbank offered rate (-IBOR) of specific tenor in different currencies, for example LIBOR in USD, GBP, EURIBOR in EUR or STIBOR in SEK.