The Forward Price

The Cost of Carry

A forward price comes from carrying the asset to delivery.

highlighted = computed this step

Borrow, buy, deliver

To set the forward price, borrow $100.00 at 5%, buy the asset now, and deliver it at maturity T equals 1.

F0=S0(1+r)TF_0=S_0(1+r)^T

Fair forward price

At maturity, the loan repayment is $105.00, so the fair forward for this setup is $105.00. A different forward price would leave one side a riskless arbitrage.

S0=$100.00,r=5%,T=1,F0=$105.00S_0=\$100.00,\quad r=5\%,\quad T=1,\quad F_0=\$105.00

Model note

This argument assumes borrowing and lending at one rate, no storage costs or trading frictions, and an asset held to delivery.

one rate, no storage, no frictions\text{one rate, no storage, no frictions}