What are the main differences between forward and futures contracts?

Short Answer

In several ways, forward and futures contracts are similar: both include an arrangement to trade assets at a future date, and both have values derived from a financial commodity.

Detailed Answer

Forward contract:

  1. It is an obligatory agreement between the purchaser and the seller.
  1. Forward contracts are derivatives that can be customized.
  1. The Forward Contract, also known as the Forwards, is a contract between two entities to buy or sell an asset at a predetermined price at a predetermined period.
  1. It is very isolated or a private contract.
  1. It being a very private contract, there are no trades made in terms of exchange.
  1. Price is the major component and hence, when the contract is written, the asset's price is determined.
  1. The credit risk and the market risk are also present in a forward contract.
  1. The benefit or loss on such contracts is only known at the time of transaction.
  1. They are not as stringent in their user agreement due to the subject matter of the contract.
  1. This is generally done in the same way as hedging and does not entail any upfront charge.
  1. Retail investors do not have easy access to forwards.
  1. The Forward contract markets are notoriously difficult to forecast.

Futures contract:

  1. The futures contracts are deals to purchase and sell a particular commodity at a particular price at a particular date in the future.
  1. A futures contract is a type of financial instrument that is standardized.
  1. These are marked-to-market daily contracts, which imply that regular adjustments are resolved day by day before the contract ends.
  1. Unlike forwards, they are traded on an exchange.
  1. They have clearance residences to ensure that the transactions are safe.
  1. All across trading day, rates are dictated by supply and demand.
  1. This is generally done in the same way as hedging and does not entail any upfront charge.
  1. Economic exposure is also lower in forwards than it is in currency futures.
  1. Futures are traded on the open market and shift over time from launch to expiration.
  1. Futures contracts are traded on a rapidly liquid market, allowing investors to join and leave whenever they want.

Difference between Forward contract and Future contract:

2021-03-14 (2).png

Categories: Stock Market
Comments (0)
Related FAQs

Can I apply more than one IPO application in my name from different saving bank accounts in same bank or different banks?

Only one PAN card can be used for one application. No matter how many different savings account details you might utilize, if there is the same PAN number in more than two applications, then all of them would be revoked.

What is difference between Mutual funds and Hedge funds?

In a way, there are a lot of similarities between Mutual Funds and Hedge Funds. In the both types of investments, a group of investors pool their money and invest in different type of securities. The main misconception about the funds is that people think that they are similar and the terms are interchangeable. In reality, they are not same and there is a very thin line between them.

What is difference Between EPF & PPF?

Whenever we talk about retirement corpus, Employee Provident Fund and Public Provident Fund come to our mind. These schemes are meant for long-term savings and support our after retirement plans. These instruments are known to be secure & steady with guaranteed earnings. You can start with small savings and end up with significant retirement corpus!

Is RKSV and Upstox Same or Different?

They are the same brand. There is no difference as since 2012, RKSV started offering retail broking. But in 2016, the company renamed itself Upstox. Every segment that Upstox has to offer is one and the same with the only different being in the name and nothing else.

What is difference - Mutual Funds vs Index funds?

The differences between index funds and mutual funds are vast. Learn what is mutual fund and index fund and know what differentiates the two investment options.

What is the difference between Debit card & Credit card?

Debit card vs. credit card - Which one to use? There are a lot of differences such as the repayment options, interest, EMI facilities, purpose, charges and benefits.

What is the difference Liquid funds vs. Savings accounts?

Based on return liquid funds outperform savings account by anything between, 2-4 % points which is 50-100 % higher return than the savings account. So, purely on the basis of returns investing in liquid funds seems a better option.

What is difference between Fixed Deposit vs Mutual Fund? Meaning

Fixed Deposit (FD) are saving tools offered by banks to deposit lump sum amount for a fixed period of time on a higher interest rate than saving accounts. Mutual funds are investment products which pool money from numerous small investors to create a fund.

What is Form 16? How is it different from Form 16A?

Form 16 refers to the Salary TDS certificate that you get from your employer. It is issued annually. Being a salaried employee in India, if your taxable income exceeds the threshhold exemption limit, your employer might be deducting certain income tax amount from your salary.

What is the difference between Demat account and trading account?

Trading Account is used for buying and selling securities while Demat Account is for holding various securities in electronic format.