A Note on Forward Price and Forward Measure REN-RAW CHEN∗

Abstract. The forward measure is convenient in calculating various contingent claim prices under stochastic interest rates. We demonstrate that caution needs to be drawn when the forward measure is used to price contin-gent claims that involve multiple cash flows. We also derive partial different equations for the forward price to demonstrate how forward contracts can be used for dynamic hedging and how hedges can be conducted if the payoff of a contingent claim depends on the forward price. Key words: forward measure, forward price, stochastic interest rate