Equity Forward

ORE defines the product as follows:

An Equity Forward contract is an agreement between two counterparties to buy/sell a set number of shares of a single name equity or an equity index, at a predetermined strike price, at the end of the contract. An equity forward does not involve any upfront payment, does not pay dividends, and settlement is cash.

Source: ORE User Guide, Products catalogue, equityforward.tex.

An equity forward is a promise to trade shares later at a price agreed today. No money changes hands at inception. At maturity the difference between the market price and the agreed price is settled in cash. A long forward profits when the share price rises. A short forward profits when it falls.

The EquityForwardData node is the trade data container for the EquityForward trade type. Only vanilla equity forwards are supported. LongShort names the direction: Long buys the underlying, Short sells it. Maturity is the date when the shares are bought or sold. The underlying is a single equity or an equity index, given by Name or by an Underlying node. That node defines the equity curve used for pricing. Quantity is the number of units. Currency is the payment currency. If the underlying is quoted in another currency, the SettlementData sub-node must carry an FXIndex to convert the payoff. Strike is the agreed buy or sell price. It must be quoted in the same currency as the underlying. StrikeCurrency is optional and defaults to the payment currency. Minor-currency values are converted to the major currency. The SettlementData node can set a payment Date. Alternatively its Rules sub-node derives the payment date from maturity with PaymentLag, PaymentCalendar and PaymentConvention.

The payoff of a long forward at maturity is the quantity times the difference between the spot and the strike, Quantity x (S_T - K). The sign reverses for a short forward. A fair new trade has no upfront payment, so its strike equals the market forward price. The forward price grows the spot at the risk-free rate and deducts expected dividends. Volatility does not enter a linear forward price.

• The spot price of the underlying equity or index. Each unit of spot moves the value almost one for one.
• The expected dividends of the underlying.
• The risk-free rates in the underlying currency.
• The FX rate when the payment currency differs from the underlying currency.
• The discount curve in the payment currency.

A long forward gains as the spot rises. A short forward gains as it falls.

The forward ages linearly. Each unit of spot moves the value one for one from the moment of the trade. The financing component decays as maturity approaches. At maturity the value equals the payoff. The contract then settles in cash and the exposure ends.

A customer can lock the future purchase or sale price of shares or an index without paying cash today. The contract hedges a planned equity trade. It also expresses a directional view with leverage. Cash settlement avoids delivery. In ORE Studio a customer books equity forwards to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a long US dollar forward on the S&P 500 index:

<EquityForwardData>
  <LongShort>Long</LongShort>
  <Maturity>2018-06-30</Maturity>
  <Name>RIC:.SPX</Name>
  <Currency>USD</Currency>
  <Strike>2147.56</Strike>
  <StrikeCurrency>USD</StrikeCurrency>
  <Quantity>17000</Quantity>
</EquityForwardData>

Source: ORE User Guide, Products catalogue, equityforward.tex, listing Equity Forward data.

The optional counterpart to this product is the Equity Option.