Equity Forward

Also known as: OTC forward

The bespoke cousin of the future: a private agreement on tomorrow's stock price, tailored to size and date.

3 min read · 492 words · Updated

1 · SnapshotThe one idea to remember
Key intuition: future = mass-produced contract from a store; forward = tailor-made suit. Same fabric, different fit and different aftercare.
2 · BeginnerWhat is it, really?

A forward is the same promise as a future — a price fixed today for an exchange on a future date — but negotiated privately between two parties instead of on an exchange. Any stock, any size, any date: the terms are whatever the two sides agree.

Because nothing is standardised, forwards are used when listed futures don't fit: hedging a stake in a single company, an odd maturity to match a corporate event, or a currency and settlement style a future doesn't offer.

The price of this flexibility is counterparty risk: with no clearing house in the middle, each side must trust the other to perform — which is why forwards live mostly between banks and institutional clients, wrapped in collateral agreements.

Payoff of a long forward at maturity: S_T − F₀, linear and symmetric.
F₀Long forwardUnderlying price at expiryProfit / loss

Point at a line to pick it out from the others.

The same trade, settled once
The buyeragrees a price todayThe dealerthe counterparty1Nothing is paid2Collateral, if a supportannex applies3The agreed forward price4The shares, or thedifference in cash

a paymentsomething deliveredonly if a condition is metnot a payment

Everything the future settles daily, the forward settles at the end — which is exactly where its counterparty risk comes from.

On the trade date

  1. The buyer → The dealer The forward price is set so that the contract is worth zero to both sides. There is no premium and no purchase price.

While it runs

  1. The buyer → The dealer Between professionals, variation margin is exchanged against the daily change. Between a bank and a corporate client it often is not, and the exposure simply accumulates.

At maturity, once

  1. The buyer → The dealer Paid in full on the settlement date.
  2. The dealer → The buyer Whether the contract delivers shares or nets to a single payment is a term of the trade, not a property of forwards.
Asset class
Equity derivatives
Instrument type
Forward (linear)
Traded
OTC, bilateral
Typical users
Corporates, funds needing custom terms

Which risks decide the outcome

Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.

  • Marketdecides it
  • Creditmatters
  • Liquiditymatters
  • Fundingbarely applies
  • Operationalbarely applies

What decides it here. Same economics as the future, different failure: with no daily settlement the exposure to the counterparty accumulates until the settlement date.

What the five mean, and which one decides where →

3 · IntermediateHow it works in practice

Mechanics

  • No upfront payment: at inception the forward price is set so the contract is worth zero to both sides.
  • Settlement: physical (shares delivered against cash) or cash-settled (pay the difference to the fixing).
  • Collateral: under ISDA/CSA documentation, the mark-to-market is collateralised daily — economically similar to futures margining but bilateral.

Where forwards appear in real life

  • Funded/unfunded equity stakes: an investor gains exposure to a stock it cannot or will not hold directly.
  • Corporate hedging: a founder hedges a concentrated position (often via collars — a forward-like structure built from options).
  • Dividend risk transfer: forward prices embed expected dividends, so forward desks are natural dividend traders.
Worked example: a fund agrees to buy 1M shares at €52 in 9 months (spot €50). At maturity the stock is €58 → the fund's forward is worth (58 − 52) × 1M = €6M. At €47, it owes €5M. In between, the mark-to-market moved daily and was collateralised.
4 · AdvancedPricing & valuation

Pricing by replication

The forward price is fixed by the same static arbitrage as futures — buy the share, borrow the cash, receive dividends:

$$ F_0 \;=\; S_0\,e^{(r+b-q)T} $$
What the symbols mean
  • Fthe forward or futures price
  • Sthe price of the underlying today
  • rthe interest rate, per year
  • qthe dividend yield, per year
  • Tmaturity, in years

where \(r\) is the funding rate, \(q\) the dividend yield and \(b\) the borrow cost / repo spread of the specific stock — for hard-to-borrow names, \(b\) can dominate and push forwards far below the "textbook" level.

Valuing a seasoned forward

After inception, a long forward struck at \(K\) is worth the discounted gap between today's forward and the strike:

$$ V_t \;=\; \big(F_t - K\big)\,e^{-r(T-t)} \;=\; S_t e^{-q(T-t)} - K e^{-r(T-t)} $$
What the symbols mean
  • Va value
  • ta point in time
  • Fthe forward or futures price
  • Kthe strike: the price written into the contract
  • rthe interest rate, per year
  • Tmaturity, in years

The credit dimension

Uncollateralised forwards carry expected-loss adjustments: CVA (counterparty may default when the contract is in your favour) and FVA (funding the uncollateralised mark). Modern pricing is therefore collateral-discounting: cash flows discounted at the rate the CSA collateral earns (typically OIS).

$$ V = V_{\text{risk-free}} - \text{CVA} + \text{DVA} - \text{FVA} $$
What the symbols mean
  • Va value

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.

5 · Desk notesHow practitioners think about it
Practitioner note: for single stocks, the forward is where three prices meet — funding, borrow and expected dividends. A "mispriced" forward is usually one of those three telling you something.

Now say it back

Close the page and give Equity Forward in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.

  1. Who wants what — two parties wanted opposite things badly enough to write it down.
  2. What the contract obliges, and when — not the payoff; the obligation.
  3. Where the money comes from — name the source, or you have described a hope.
  4. What makes it lose — the ordinary way, not the dramatic one.

Do it with a clock → · why these four

Put Equity Forward beside any other instrument →

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Information and education only. Every page, figure and calculator on this site exists to explain how financial instruments work. Nothing here is investment, tax or legal advice, a recommendation, or a valuation you can rely on. Full disclaimer