Hi,
I have tough time understanding the off-market forwards payment direction.
In off-market forwards, when the value is positive, the long pays that amount upfront to the short.
In case of regular forward markets (not off-market), when the value is postive, the long gains and short pays.
Why is it opposite in off-market?
Thanks.
A long position is an agreement to buy. A short is an agreement to sell. If something already has a value, why would the seller (the short) sell it to the buyer (the long) without getting paid this value? Think of it like buying a house. if the house gains in value before you buy it, you’re going to have to pay this to the seller. If the gain comes after you buy it, it’s you who benefits.
They aren’t opposite. In off the market FRA when value is positive the Long is already having a gain that’s why to offset that he pays it to the short. While in regular FRAs the same concept upholds, value is positive long has a gain. In regular FRAs the only difference is that gain results on some future date while in off the market FRAs with positive value, the gain is already there which needs to be offset.