Abstract

Abstract

Forward contracts are among the simplest and most commonly used derivative instruments in financial markets. Their primary purpose is to hedge against price risk arising from fluctuations in the value of underlying instruments such as currencies, interest rates, or commodities. Although the literature extensively describes the mechanisms and valuation models of forward contracts, in investment practice there are numerous challenges related to their application within specific financial structures, includinf closed-end incestment funds.

Closed-end investment funds, due to their limited liquidity and specific portfolio structure, often utilize derivative instruments to optimize investment strategies and manage risk. In particular, short-term forward contracts with a maturity horizon of up to 12 months can play a significant role in stabilizing cash flows and shaping predictable investment outcomes. The short duration of such contracts also facilitates more accurate estimation of input variables, which in practice translates into greater precision in valuation modeling.

The valuation of forward contracts is based on the fundamental principle of no arbitrage, and its standard models assume a perfectly competitive market and full predictability of financing costs. However, in the case of closed-end investment funds, these conditions may differ significantly. The characteristics of investors, the fund’s investment policy, and the limited liquidity of assets determine specific risks that must be considered in the valuation process. Therefore, the analysis of short-term forward contracts in this context represents an important area of research, combining financial theory with practical portfolio management.

The aim of this article is to present the issue of valuing forward contracts with a maturity of up to 12 months in the context of closed-end investment funds. The paper discusses the basic valuation models of forwards, their practical limitations, and the specific characteristics of using these instruments within the closed-end fund structure. Particular emphasis is placed on practical aspects such as market risk management and the adjustment of valuation methods to conditions of limited liquidity. This analysis aims to deepen the understanding of the usefulness of forward contracts in the operations of closed-end investment funds and to indicate potential directions for further research in this area.

Keywords: currency risk, forward contracts, derivatives, risk hedging, financial instruments, derivative instruments