Forwards are essentially contracts between two parties to respectively buy and sell an asset at a predetermined price on a future date. The side agreeing to buy the asset in the future is referred to having a long forward position or the side agreeing to sell the asset is referred to having a short forward position. This future date on which the transaction will settle must be after the spot date, that being the settlement date of trades executed today and is commonly known as the forward date. The price agreed upon at the forwards inception is called the forward price. To illustrate, consider the foreign exchange market, though the principles we all look at are universally applicable to all asset classes. Picture a trader who has entered into a forward contract to purchase 100 million US dollars in exchange for euros. The rate has been set at 1.1029 with a transaction to be settled in three months time. This timeline typically commences after the spot date, meaning that a three month forward refers to three months following the spot date, not the date of the agreement.

On the transaction date, the parties determine and agree upon the specifics the size of the trade, the forward date on which the forward contract will settle, and crucially the forward price. When the forward date arrives, settlement occurs, our trader will receive the 100 million US dollars and pay out 90.67 million euros. That's the 100 million US dollars divided by the forward price agreed of 1.1029. Should the US dollar appreciate over the course of these three months and assuming this transaction was a speculative bet on a strengthening dollar, the trade could yield substantial profits. The exact profit hinges on two factors, the Euro US dollar exchange rate at the forward settlement and the original forward rate agreed upon. So the forward price is not an arbitrary figure. It is a pivotal element in the architecture of the forward contract.