Forward markets


1. What is it?

Forward markets regards the future. A forward operation involves buying or selling a volume of shares, at certain prices, for future delivery. Conditions are freely negotiated between the counterparts and delivery dates can be set to the minimum of 16 days from the operation and the maximum of 999 days. Prices agreed comprise the current share prices plus interests to be negotiated, always depending on the scheduled dates.

Forwards work as a financing operation. In one corner we have an investor willing to buy shares, but with no current resources for doing that, so he wants to “book” an opportunity. This way, by using forwards and paying the current share prices plus interests, he can guarantee a future purchase. In the other corner, we have an investor who wants to sell shares and maximize gains with the interest rate. He can also buy cash and sell forwards, booking his shares sales and getting interests paid while he waits for the deal to be closed.

Forwards are similar to future contracts, but have some few differences. In a forward contract, both parts agree and third parties cannot be involved. Futures have a standard and can be freely traded within the market. With forwards, if one of the counterparts decide on finish the contract, the other part must accept that. Besides, forwards are not daily updated, and results just come by the expiry date. Forwards are traded in auctions, which is pretty much the trading practice for cash markets.

Counterparts rights and duties can be summarized as follows:

Buyer: rights of receiving a share in a future date, paying interests previously agreed in a contract. If share prices by the redemption date are higher than those previously agreed plus the interests, the investor accumulates profits, as he is going to resell the shares for more than he actually paid.

Seller: must be delivering shares by the redemption date to the buyer, as they’ve already been sold. As rights, he gets the target prices plus interests, as agreed with the buyer. If share prices are lower than the agreed in contract by the redemption date, the seller accumulates profits, because he sold the shares at a higher price than they are worth on the spot market, at the maturity of the contract. In addition, there is the profit from the interest of the term. Even if agreed prices are higher than the current share prices, the seller can still make some profits, because of the interests.

All rights, dividends and payments made by the shares during the period belong to the buyers, and shall be paid together with the shares delivering, by the redemption date. If the company pays dividends or interest on own capital for the underlying period, the buyer still gets all rights of receiving them, being received on the settlement date of the contract.

2. Characteristics

Trading code

Terminology of trading terms is done as follows:

1. Share code, such as PETR, VALE, OGXP, etc.

2. Number, indicating which paper is being trading in future.

3. Letter regarding the class, which can be three:

Point-based forwards, which are represent by a number that indicates the forward prices in BRL, updated by a rate agreed between the counterparts.

Dollar-tracked forwards, represented by the letter “D”.

Flexible forwards, represented by the letter “S”.



Contract maturity

Any shares at Bovespa can be traded in forwards. However, closing contracts with good liquidity is need, so they follow standards, with a determined lifetime of 30, 60, 90 or 120 days, etc. This way, trading them becomes easier. Also, they can be exercised before the expiry dates. Forwards can be exercised in the following ways:

Expiry date exercise: just happens by the contract’s expiration date, when the buyer actually pays for shares the price plus interest, which has been previously agreed, and the seller delivers the correspondent stock, realizing the contract.

Anticipated exercise: if the buyer wants to, he can ask the seller to realize the contract beforehand, implying the payment of the price stipulated for the period in which the contract was opened. If the seller agrees, the contract is exercised and positions are closed. The buyer can ask for this possibility any time up until three work days prior to the contract’s due date.

Forwards roll-over: one can rollover forwards, in other words, to set a new expiration date for them. As the expiry days come, if both buyers and sellers want, the forward can have its expiration date postponed to a new date. The change can be made any time up until three work days prior to the contract’s due date. For that to happen, the investor needs to sell the share cash, exercise the contract and set up a new one, everything in the same day. The buyer, then, will just be charged the difference between the established prices.

Guaranty margin

For dealing with forwards, a guaranty margin must be deposited, in order to minimize the risk of the buyer not having money to honor with your payments at maturity of the forward contract. The margin requirement is stipulated by the Exchange in accordance with the margin calculation criteria for the contracts. Assets accepted as guarantee include cash, gold, bonds and notes, letters of guarantee, shares and quotas at investment funds. The seller needs to deposit the negotiated shares as margin, while the buyer has to deposit about 20% of the shares’ value. If the share price traded in the spot market price is too far of the price traded in forward operations, where the buyer has high losses, an additional margin deposit guarantee will be required in order to have no trouble paying the forward contract to the seller.

The initial margin is paid by the buyer when he gets the forwards. If he fails to pay for the shares or contract’s interests, the stock exchange grabs the guaranty margin, paying the debts to the forwards’ seller.

3. Types

There are three types of forwards in Brazil:

Flexible forward

The flexible forward follows all rules and standards of the traditional forward market, but it has an additional advantage. One can change the underlying assets and shares negotiated. In this case, the buyer should sell the shares in the spot market, and the amount will be held by CBLC without interests gains. So the buyer can purchase other shares in spot market, and they will be replacing that one which has been sold in the forward contract.

Points forward

The term points allows the secondary trading of forward contracts, where the amount of the contract is converted in points, so each point has an specific value in R$. Rules and standards follow the traditional forward contracts.

Dollar forward

The contract is daily updated by using the dollar exchange rates (PTAX) between the day of the deal and the expiry date.

4. Strategies

The main strategies for dealing with forwards are:

Hedging prices

This strategy is a mechanism to set share prices, when an investor believes its prices can raise before the end of the contract. This way, the buyer doesn’t need to to imediately pay for the shares and can peg the shares pricing, getting some extra time for managing the resources for paying for the shares. The strategy gives him a guarantee that prices will remain the same, but at the same time he can get the benefits from any pricing move taking place between the deal and the forward expiry date. However, if prices drop, he still needs to pay the same for all shares dealt.

Risks mitigation

In this strategy, the investor prefers to close a deal forward rather than imediately cash the shares, just paying for the guaranty margin upfront. That mitigates risks, as eventual losses can also be offset by other deals closed. For instance, if an investor has some Petrobras shares on his portfolio, but believes Vale’s shares to hike up, he can set up a forward contract even if he doesn’t get enough cash for buying Vale’s shares – actually, even the guaranty margin can be fill in by using his Petrobras’ shares. This way, he still keeps Petrobras’ shares and is able to peg Vale’s prices for a future date, and can eventually make profits from both companies. Remind that forwards are a leveraging asset and huge losses may occur, sometimes even exceeding the invested amount or the guaranty margin, having to contribute more resources to cover its position, thus increasing the risk..

Raising capital

In this strategy, the investor needs to raise capital asap, but is not willing to sell his portfolio. So he sells some shares cash and imediately set up forwards for the same assets and prices he just sold. This way, he is able to raise cash to invest in something else. By the expiration date, the investor buys his shares back, for a price similar to that he earned from selling his shares upfront, although paying some extra costs from the operation itself.


Setting up a forward is cheaper than buying shares in the spot market. That happens as disbursements are not imediately required, and can be rolled over to a future date. This way, the investor just need to have in hands those 20% for the guaranty margins, assuring a purchase for certain price. Thus, leveraging is easier with forwards, and the investor may take positions much higher than his actual financial availabilities. If the prices hike, leverage will provide higher returns to the investor, because he was able to buy more quantities than if he bought on the spot market. On the other hand, a fall in the price of traded share could result in high losses for the investor.


This strategy looks for just earn from interests in forwards. An investor buys shares in the spot market, and right after he sets up a forward, looking for earning with the balance between the cash prices and those which have been agreed in a forward plus a interest. This strategy is less risky, as the seller of a forward is always receiving the agreed sum by the expiration date. However, transaction costs might be reducing dramatically the expectations, and sometimes turning the operation not feasible.

Increase revenues

This strategy is widely used by investors who want to sell shares and will not be using the cash in a short period. This way, they set up forwards to earn from interests, increasing their revenues. By the expiry date, the seller receives for any shares sold the price which has been agreed (that price being the same price he would sell on the spot market before making the operation of the forward), and also the interests for the operation itself.

5. Taxation

Costs and taxes

Expenses from investing in forwards include:

Brokerage – it can change depending on the broker. However, most of them use the basic operational fees, stipulated by Bovespa.

Stock exchange fees – that includes emoluments and registering fees by BM&F, charged as follows:

Emoluments: those fees charged by the stock exchange for its services. That applies to the contracts negotiation (opening or closing position before maturity), option exercises, registration and early settlement and assignment procedure rights. Emoluments for individuals trading forwards reach 0.018% of the contract.

Liquidation charge: this charge regards to the liquidation of the contracts by the expiry, on top of clearing expenses. Usually, this charge is a fixed value, charged by contract, regardless of trading volume.. In forwards, this charge reaches 0.0275% of the contract’s value.

Clearing fees: a value charged to register the operation on the clearing house, that only applies to deals that open or close positions before the expiry date, and charged one day after those events. Currently, clearing fees for forwards are set in 0.0195%.

All charges and operational costs are to be paid in a D+3 basis.

Income tax

The taxation of contracts will be at a rate 15% of the positive result between the sale price of the shares on the settlement date of the contract price less the established and as of the close of position in it. There is also the rate of 0.005% income tax withholding.

All costs and fees paid for investing can be deducted from the income tax amount, including those from BMF&Bovespa. Compensation for losses incurred net gains earned in the same month or subsequent months, being valid only for the same type and operating mode.

The payment of taxes is the responsibility of the investor himself, except when withholding taxes apply, and must be calculated and paid monthly on the last business day of the month subsequent to the calculation. The calculation is performed over the term of the contract and not monthly.

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