If the value of the forward contract is negative, why is it that the short pays the long. I thought it was the other way around.
can anyone explain this like you would explain something to a small child?
it depends on the position that you are taking. If you are the short position, value is negative. You enter into sell the price, market price (S) drops in the future (expiration), you gain. think of it as a put option. Put will win when the price goes down. It’s just the + and - that is confusing.
you win-long pays short. If you are in the long position, value is positive, you win,short pays long.
I think you meant when value of the forward contract to the long position is positive and to the short position is negative, the short pays the long.
Negative to whom? Long or short?