Payoff Profile of a Forward Contract

Example 2.2.:

The forward price of the MPC forward contract (Example 2.1.) was F₀ = $100 /bbl.

• MPC will gain if the spot price of the crude oil on T= 9/1/2012 is P_T > $100. The gain will be (P_T - F₀) per bbl.
• MPC will lose if the spot price of the crude oil on T= 9/1/2012 is PT < $100. The loss will be (F0 - PT) per bbl.
• MPC's payoff profile is along the 45 degree line in Figure 2.4 (Long Forward Payoff - see below).
• The payoff profile for Exxon, the seller, is along the negatively sloped 45 degree line in Figure 2.5 (Short Forward Payoff - see below) - exactly opposite to MPC's (zero sum game).