Pricing of an Exotic Forward Contract

Abstract

In this paper we study a pricing problem of an exotic Forward contract. Unlike the standard Forward, the contract is not fair, and like an option, it is compensated by the premium. Using standard arguments in the Black-Scholes economy, an explicit formula for hedging as well as pricing is obtained. This is possible because of an exotic way of settlement, which is another focus of this paper. Contrary to our intuition, simpler ways of settlement do not necessarily imply a simpler formula.