Is there any difference between the delivery price and the forward price of a forward contract? From the definition Investopedia gives of forward price and delivery price, they appear to be the same. Is there any difference?
The second article you linked to (on delivery price) states it best:
In forward contracts, the forward price and the delivery price are identical when the contract begins, but as time passes, the forward price will fluctuate and the delivery price will remain constant.
In short, the forward price only equals the delivery price the moment the contract is created. After that, they can, and almost certainly will, differ.
My somewhat longer answer to this question addresses each of the three time periods in the life of a forward contract; the following uses three assumptions/pieces of notation.
- The delivery price is fixed.
- The contract matures at time
tis just a parameter that represents the current time.
Those points look exceedingly basic, and they are. I point them out merely for the sake of completeness.
The three key periods are the moment the contract begins (
t = 0), the life of the contract (
0 < t < T), and the contract at maturity (
t = T). In each of these periods, different factors affect the forward price, and the implications for the relationship between the forward price and the delivery price are different in each period.
Contract begins (
t = 0):
This is the simplest case. Two parties agree on the contract and create it. As the Investopedia article states, the forward price equals the delivery price.
Life of the contract (
0 < t < T)
Over the life of the contract, the forward price depends on multiple factors, especially the spot price of the underlying asset. Because constantly-changing factors like supply and demand affect the spot price, the forward price can, in turn, vary considerably over the life of the contract. The same rationale applies for other factors that affect the forward price, like the risk-free interest rate, the cost of carry, etc.
This implies that in this time period, the delivery price is still fixed at the price specified in the contract, but the forward price is fluctuating as the spot price and other values change. In other words, they aren't equal.
Contract matures (
t = T)
At maturity, the forward price converges to the spot price of the underlying asset. Investopedia has a nice summary of why this convergence occurs, but a quick explanation is that if these two prices didn't converge, an arbitrage opportunity would exist, and traders would quickly act on this and remove any price differential.
Forward contracts are non-standard, however, so it's completely possible that multiple contracts on the same underlying asset, each specifying a different delivery price, are maturing on the same date (presumably with different parties and counterparties involved). Since there can be multiple delivery prices somewhere in the market, but only one spot price of the underlying asset, these won't be equal for all forward contracts maturing on the same date. Therefore, at maturity, the forward price/spot price (which are now the same) won't necessarily equal the delivery price.