Let's look at an example to see how the fair price of an equity forward is calculated. Here's the data we have. The current spot price of the company's share is 100. The 12 month interest rate is 5% as the future value of dividends over the same period is six.

This represents the value of the dividends in one year's time, but the dividends could have been paid any time between now and one year's time, and compounded forward to get to the future value of six.

Applying the formula spot price times by open one plus I times by days over basis, close bracket dividends and simplifying by ignoring day count conventions and assuming the number of days matches the basis, we calculate the 12 month fair forward price as follows as 100 the spot price, plus five the 5% interest rate applied to the spot price of 100, minus six the future value of the dividends.

This gives a fair forward price of 99. Note that in this example, the forward price is driven by three key variables, the spot price of the assets, the interest rate level, and the level of dividends. If any of these variables change, the fair forward price will likely change as well. This means that the market risk profile is different between spots, equity investments, and equity forward contracts since there are more factors at play for forward pricing. While spot prices of stocks are indirectly linked to interest rates and expected dividends, equity forward prices are directly influenced by them. This means that the mark-to-market position of an equity forward contract can be impacted by changes in interest rates and or expected dividends, even if the spot price of the underlying remains the same.