CFA Level I Exam · Derivative Instrument and Derivative Market Features

Forwards, Futures and Swaps: Payoffs and Differences

Updated 7 October 2026 · Fact-checked

Forwards, futures and swaps are forward commitments: both sides must transact later at a price fixed today. A forward is a private OTC contract. A futures contract is standardized, exchange-traded and marked to market daily. A swap exchanges a series of cash flows. At expiry, a long forward pays ST − F0 and a short pays F0 − ST.

Understand Forward Commitments: Forwards, Futures and Swaps

A forward commitment is a contract that binds both parties to a transaction at a future date at a price agreed today. Neither side can walk away. This is the key contrast with options, which give one side a right but not an obligation. Forward commitments include forwards, futures and swaps.

In a forward contract, the long agrees to buy the underlying and the short agrees to sell it at the forward price F0 on the expiry date. It is a private, over-the-counter (OTC) deal, so terms are customized. It carries counterparty credit risk and is usually settled at expiry, by delivery or in cash. It is typically not regulated in the way exchanges are, and it is often illiquid.

A futures contract is a forward-style deal that has been standardized and listed on an exchange. Contract size, expiry and delivery terms are fixed. A clearinghouse stands between buyer and seller, which removes most counterparty risk. Both sides post margin, and gains and losses are settled every day in a process called marking to market. Most futures positions are closed out before expiry by taking the opposite position, not by delivery. Futures are regulated and highly liquid.

A swap is an agreement to exchange a series of cash flows over time. Think of it as a package of forward contracts. In a plain vanilla interest rate swap, one party pays a fixed rate and receives a floating rate on a notional amount. The notional is usually not exchanged in an interest rate swap. Swaps are OTC and customized, and they are often settled by netting: only the difference in the two payments changes hands.

Payoffs are linear and symmetric. The long gains when the underlying rises above the contract price. The short gains when it falls below. One party's gain is exactly the other party's loss, so the contract is a zero-sum game before costs. Forwards, futures and swaps struck at market terms have zero value at initiation and need no premium. This differs from options, where the buyer pays a premium. An off-market swap is the exception, because it can involve an upfront payment.

Key formulas to remember

Long forward payoff at expiration: Payoff (long) = ST − F0; ST is the spot price of the underlying at expiry. F0 is the forward price agreed at initiation. It can be positive or negative.
Short forward payoff at expiration: Payoff (short) = F0 − ST; Exactly the negative of the long payoff. Applies per unit; multiply by contract size.
Forward payoff, total: Total payoff = (ST − F0) × units (long); Always multiply by the number of units, such as barrels, ounces or shares.
Fixed-for-floating swap net payment: Net payment = (fixed rate − floating rate) × notional × period fraction; Positive means the fixed payer pays. Negative means the fixed payer receives. Check the day-count period, such as 0.5 for semiannual or 0.25 for quarterly.
Futures daily settlement: Daily gain (long) = settlement price today − settlement price yesterday; The short gets the opposite. The result is added to or taken from the margin account.

How to solve Forward Commitments: Forwards, Futures and Swaps questions

Use this routine for any question on forwards, futures or swaps, whether it asks for a definition, a comparison or a payoff.

1Identify the instrument: forward (OTC, customized), futures (exchange, standardized, daily settlement) or swap (series of exchanged cash flows).
2Confirm that it is a forward commitment. Both sides are obligated, and forwards, futures and swaps struck at market terms need no premium at the start. An off-market swap is the exception.
3Identify the party: long (buyer) or short (seller). For a swap, identify the fixed payer and the floating payer.
4For a payoff, write down the contract price F0 (or the fixed rate) and the final spot price ST (or floating rate).
5Compute the long payoff as ST − F0, then flip the sign for the short. For a swap, compute (fixed − floating) × notional × period fraction for the net payment by the fixed payer. A positive result means the fixed payer pays; a negative result means it receives.
6Multiply by the number of units or the notional, and keep the sign: gains positive, losses negative.
7For comparison questions, test each option against the features: counterparty risk, regulation, liquidity, settlement timing and customization.
8Eliminate options that contradict the forward-commitment idea, such as a premium paid up front, or a right but no obligation.

Quickest way: Sign check for payoffs

When to use it: Use when a question gives you a final spot price and a contract price and asks for a gain, a loss or the payoff to one party.

Ask: did the spot end above or below the contract price?
If spot is above the contract price, the long wins and the short loses by the same amount.
If spot is below, the short wins and the long loses by the same amount.
Take the absolute gap, multiply by units, and attach the sign for the party you were asked about.
With three options, the sign and size usually remove two choices immediately.

Common mistakes in Forward Commitments: Forwards, Futures and Swaps

Calling a futures contract customized and OTC, or a forward exchange-traded.
The two are economically similar, so candidates blur the features.
Fix: Remember: forward = private, customized, credit risk; futures = exchange, standardized, clearinghouse, daily marking to market.
Reversing the payoff: using F0 − ST for the long.
Candidates mix up who benefits from a price rise.
Fix: The long buys, so the long gains when the price rises. Long = ST − F0. Short is the opposite.
Believing a forward commitment requires a premium at the start.
Options are taught nearby and the premium idea carries over.
Fix: Forwards, futures and market-rate swaps have zero value at initiation and need no premium, unlike options. Futures only require margin, which is a good-faith deposit, not a price.
Thinking the notional principal is exchanged in an interest rate swap.
Candidates confuse swaps with loans or bonds.
Fix: In a plain vanilla interest rate swap the notional is only used to compute payments, and usually only the net amount is paid.
Ignoring the period fraction on swap payments.
Rates are quoted per year, but payments are made semiannually or quarterly.
Fix: Multiply by the fraction of the year, such as 0.5 for semiannual payments, before reporting the payment.
Saying futures settle only once, at expiry.
Forwards usually settle at expiry, so candidates carry that idea over to futures.
Fix: Futures are marked to market daily. Gains and losses flow through the margin account every day.

Worked examples

Example 1

A trader enters a long forward contract to buy 1,000 barrels of oil at USD 70 per barrel. At expiration the spot price is USD 76. What is the payoff to the long? A: −USD 6,000. B: +USD 6,000. C: +USD 76,000.

Show the solution

Contract price F0 = USD 70. Spot at expiry ST = USD 76.
Long payoff per barrel = ST − F0 = 76 − 70 = USD 6.
Multiply by 1,000 barrels: 6 × 1,000 = USD 6,000 gain for the long.
Option A has the sign reversed. That is the payoff to the short (F0 − ST = 70 − 76 = −USD 6 per barrel). Option C uses the spot price level (76 × 1,000), not the gain.

Answer: B: the long gains USD 6,000.

Example 2

A company is the fixed-rate payer in a one-year interest rate swap with quarterly payments on a notional of EUR 10,000,000. The fixed rate is 3.00% a year. For one quarter, the floating rate is 2.20% a year. What is the net payment by the fixed payer for that quarter? A: EUR 20,000. B: EUR 75,000. C: EUR 80,000.

Show the solution

Fixed payment for the quarter = 3.00% × 10,000,000 × 0.25 = EUR 75,000.
Floating payment for the quarter = 2.20% × 10,000,000 × 0.25 = EUR 55,000.
The company pays fixed and receives floating, so net = (fixed − floating) = 75,000 − 55,000 = EUR 20,000. The result is positive, so the fixed payer pays EUR 20,000.
Option B is only the fixed payment, not the net amount. Option C forgets the 0.25 period fraction on the rate difference (0.80% × 10,000,000 = 80,000).

Answer: A: the fixed payer makes a net payment of EUR 20,000.

Exam tips

Expect questions that ask which feature belongs to a forward and which to a futures contract. Learn the contrast list: customization, counterparty risk, regulation, liquidity and settlement.
Items never use 'except' or 'all of the above', so each option is a single statement. Test each one against the definition.
Always check the party first. Many wrong options use the right size with the wrong sign.
For swaps, look for the period fraction and for who pays fixed. These are the usual traps.
Remember that forwards, futures and market-rate swaps have zero value at initiation and need no premium. This separates them from options.

Practice questions from Derivative Instrument and Derivative Market Features

Forward Commitments: Forwards, Futures and Swaps in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Forward Commitments: Forwards, Futures and Swaps: frequently asked questions

What is the difference between a forward and a futures contract?

A forward is a private, customized OTC contract that normally settles at expiry and carries counterparty risk. A futures contract is standardized, traded on an exchange, guaranteed by a clearinghouse and marked to market daily. Futures are more liquid and more regulated.

What is a swap in CFA Level I?

A swap is a contract to exchange a series of cash flows over time. In a plain vanilla interest rate swap, one side pays a fixed rate and the other pays a floating rate on a notional amount. It can be seen as a package of forward contracts.

How do you calculate the payoff of a forward contract at expiration?

For the long, payoff = spot price at expiry − forward price. For the short, payoff = forward price − spot price. Multiply by the number of units in the contract.

Is the notional amount exchanged in a swap?

In a plain vanilla interest rate swap, the notional is not exchanged. It is only used to compute the payments, and usually only the net amount is paid. Currency swaps differ and can involve exchange of principal.