Regarding early delivery of forward contract

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manish (Querist)
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29 August 2012 Sir,
will u please get me understand with example how to solve problems regarding early delivery.,extension,cancellation of forward contract

CA Suresh Jain

CA Suresh Jain (Expert)
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31 August 2012 What is the issue in the transactios.

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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20 July 2025 Sure! Let me explain the concepts of early delivery, extension, and cancellation of forward contracts with examples so you can solve related problems easily.

1. Forward Contract Basics:
A forward contract is an agreement between two parties to buy or sell an asset at a future date for a price agreed upon today.

2. Early Delivery of Forward Contract:
Definition:
Early delivery means delivering or settling the contract before the agreed-upon delivery date.

How it works:

The buyer and seller agree to settle the contract early (before maturity).
The forward price needs to be adjusted for the earlier settlement date.
Example:

Contract: Buy 1000 units of commodity at ₹500 per unit after 6 months.
Current date: Contract date.
After 3 months, parties agree to settle early.
How to adjust price:

Suppose the risk-free interest rate is 8% p.a. (compounded).
Forward price for 6 months = ₹500
Forward price for 3 months = ?
Calculate the present value of the contract price for 3 months instead of 6.

If 6 months forward price is ₹500, then 3 months forward price can be calculated by discounting or adjusting with interest rate.

3. Extension of Forward Contract:
Definition:
Extension means postponing the delivery date beyond the original maturity date.

How it works:

The original forward contract delivery date is extended.
The forward price is adjusted to reflect the cost of carrying the contract for the extra period.
Example:

Contract: Buy 1000 units at ₹500 per unit after 6 months.
After 6 months, the buyer and seller agree to extend delivery by 3 months.
Interest rate: 8% p.a.
You calculate the new forward price by adding carrying cost for the extension period.

4. Cancellation of Forward Contract:
Definition:
Cancellation means terminating the forward contract before maturity.

How it works:

Both parties agree to cancel the contract.
The party who suffers a loss compensates the other party based on the difference between the contract price and prevailing market price.
Example:

Contract: Buy 1000 units at ₹500 after 6 months.
At 3 months, market price for immediate delivery is ₹520.
Contract is canceled. The buyer has a loss or gain based on price difference.

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