OTC forward contracts will pay out the contract notional amount times the difference between an index value on the contract settlement date and the trade strike index level. The strike level is set when a trade is initiated, and typically will be set at or near the then-current forward price for the specific reference index. The payout mechanics look like this: Notional amount * (Final Index Value – Strike) The notional amount is effectively the dollar sensitivity of the trade to a 1 point change in the relevant index value; bullish (long) trades will have a positive notional amount; bearish (short) trades will have a negative notional amount. Cash Flow Examples A U.S. housing forward contract based on an S&P/Case-Shiller Home Price Index Bullish Trade When the index at the forward (maturity) date is greater than the pre-set strike level established on the original trade date, the bullish counterparty (i.e., the forward contract “long”) will receive a payment: Bearish Trade When the index at the forward (maturity) date is less than the pre-set strike level established on the original trade date, the bearish counterparty (i.e., the forward contract “short”) will receive a payment (technically, this takes the form of a “negative payment” to the dealer/counterparty):

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