Six months ago a fund agreed to buy 10,000 shares of Kabini Cables at Rs 520 in one year. The stock is now Rs 560, six months remain and the rate is 7% continuous. What is the forward worth today, and to whom?

The forward is worth about Rs 5.79 lakh to the fund, the buyer, and the same amount is a liability for the dealer. Per share it is the stock at Rs 560 less the present value of the Rs 520 delivery price, Rs 502.11, which is Rs 57.89. The check agrees: a new six-month forward would be struck at Rs 579.95, Rs 59.95 above the fund's price, and that gap discounted six months is again Rs 57.89.

Picture booking a flat for Rs 52 lakh payable on possession in a year. Six months later, flats in the same building are selling for Rs 56 lakh for immediate occupation. Your booking has become valuable, and someone would pay you to take it over. A forward is struck at zero value because its price is set at fair value on the day, but as soon as the stock moves the fixed delivery price is either a bargain or a burden, and the contract has a value equal to that bargain measured in today's money. Kabini has risen from where it was, so the fund's right to buy at Rs 520 is the bargain.

Write down what the fund will do at delivery: pay Rs 520, receive one share. Bring both to today. The share is worth Rs 560 today, because holding it to delivery costs nothing extra when there is no dividend. The Rs 520 is paid in six months, so today it is worth Rs 520 times e to the minus 7% times half a year, Rs 502.11. The forward is worth Rs 560 less Rs 502.11, which is Rs 57.89 a share and Rs 5.79 lakh on 10,000 shares, to the fund. The dealer is on the other side and carries the same amount as a liability.

Ask what a new forward would cost. A six-month forward struck today would be fair at Rs 560 grown at 7% for six months, Rs 579.95. The fund holds the right to buy at Rs 520 what a new buyer would have to pay Rs 579.95 for, so it is Rs 59.95 better off at delivery, and that gap discounted back six months is Rs 57.89, the same answer. The two methods have to agree; if they do not, one of the rates or times has been misread. The second method is the one a dealer uses when the forward is on something with income, because the new forward price already allows for dividends or carry, and it generalises to currency forwards, where the new forward rate is quoted directly.

Now answer the collateral desk. If the two sides exchange margin on the forward's value, the dealer owes the fund about Rs 5.79 lakh of collateral, less any threshold in their agreement. If there is no collateral agreement, the fund carries a Rs 5.79 lakh credit exposure to the dealer, which is the amount it would lose if the dealer failed today. State the limits: the value moves almost rupee for rupee with Kabini, so this mark is only good for today, and if Kabini declares a dividend before delivery the share is worth less to a forward holder than to a shareholder and the present value of the dividend has to come off the Rs 560.