Forward Option See the same at the new domain: fincyclopedia. An option whose underlying is a forward contract.
This option gives the holder the right to enter forward option a forward contract whereby he can buy or sell a specific underlying asset at a certain forward option time for a certain price determined in the forward contract. In a forward option, the contract specifies a period of time, rather than a certain date, during which the forward option will exercise his right to trade the underlying.
The forward option is, in essence, an agreement to trade in the future for a fixed price set today.
There are several types of financial forward contracts that are used as underlying. Financial institutions quote forward exchange rates for commercial customers. Forward contracts on Treasury securities, known as when issued WI contracts trade in the week preceding a Treasury auction.
Furthermore, the so-called "to be allocated" TBA mortgage-backed securities can be sold forward. Options on such contracts or instruments trade over the counter daily among wholesale dealers in the underlying cash securities. An example forward option a forward call option which gives the holder, if forward option, a long forward contract associated with a specific exercise price.
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The value of the exercised call is equal to that of the delivered forward contract. Read more Comments Last update: May 07, See also.