What Is a Forward Price?
A forward price is the price two parties agree on today for buying or selling an asset at a specified date in the future. The agreement is a forward contract, which is usually a private deal between two parties. No money changes hands when the contract is signed. On the delivery date, the buyer pays the agreed price and the seller hands over the asset. Forward prices are common for commodities, currencies, and some bonds. They often differ from the current market price, known as the spot price.
How Forward Prices Are Set
A forward price is not a prediction of where the asset will trade. It is mainly driven by the cost of holding the asset until delivery, often called the cost of carry. For a simple asset with no income and no storage costs, the forward price is roughly the spot price grown at the interest rate for the time until delivery:
Forward price = Spot price × (1 + interest rate)^time
Here, time is measured in years. Financing and storage costs push the forward price up. Income the holder receives, such as dividends or bond coupons, pushes it down. For some commodities, the benefit of physically holding the goods, called a convenience yield, also lowers it.
The formula holds because of arbitrage. If the forward price were too high, a trader could buy the asset at spot, pay to hold it, and sell it forward at a locked-in profit. If it were too low, the reverse trade would work. Such trades push prices back toward the formula.
Example and Risks
Suppose a farmer and a bakery agree today on a price for delivery of wheat at a later date. The farmer is protected if prices fall, and the bakery is protected if prices rise. However, the agreed price is fixed. If the spot price at delivery ends up higher or lower, one side gains and the other loses compared with the market. Forward contracts are also private and customized, so each side faces the risk that the other will not pay or deliver. Exchange-traded futures contracts reduce this risk because a clearing house stands behind each trade and settles gains and losses daily.
Why It Matters to Investors
Forward prices show how the market links current prices to future delivery and financing costs. Comparing forward prices with spot prices can offer clues about whether the market expects supply to be tight or plentiful. They are useful reference points, but they are not guarantees of future value, and they do not directly show what an asset will be worth when delivered.
Updated November 5, 2026. For general education only; not financial, tax or legal advice.