In this example, we're going to look at a client who's entered into an equity forward contract with a bank where the client has agreed to buy 1,000 Microsoft shares. That's our fixed quantity of our fixed underlying asset for $75. That's the forward price and the specific date when this transaction's gonna take place is in one year's time. From this diagram, we can see that the stock price went up to $85 in one year's time. The long side of the contract would only have to pay the forward price of $75 to take delivery of the Microsoft stock. That is worth 85 on the open market, making themselves a $10 gain. However, it is also possible for the long side of the forward contract to suffer a loss. If the stock price went down, let's say to $60, then this long side of the contract would still be obligated in one year's time to pay the $75 forward price to take delivery of the stock, even though the stock is only worth $60, suffering a $15 loss.

Conversely, for the short side of this contract, this payoff diagram looks like a mirror image around the horizontal axis. This is the payoff diagram for the bank. In our example, if the stock price, using the same examples as we had for the long position before, when up to $85 here, the short side of the contract has to deliver the underlying stock, but we'll only receive the forward price of 75 for it. So we're delivering something that is worth 85, but only getting 75 for it, therefore suffering a loss of $10. However, if the underlying stock went down to $60 here, the short side of the contract would still have to deliver the underlying stock, but would receive 75 for it. They would be delivering something that is only worth 60, but receiving $75 of cash for it, which is great, making a gain of 15 for the short position. Since the contract is only between these two counterparties, the client and the bank. In our example where one side is making money, the long side, if the underlying asset goes up and the short side, if the underlying asset goes down the other side must be losing exactly the same amount of money.