What are the main differences between forward and futures contracts?
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- Updated On:26-May-2021
- Replies:2
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:
- It is an obligatory agreement between the purchaser and the seller.
- Forward contracts are derivatives that can be customized.
- 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.
- It is very isolated or a private contract.
- It being a very private contract, there are no trades made in terms of exchange.
- Price is the major component and hence, when the contract is written, the asset's price is determined.
- The credit risk and the market risk are also present in a forward contract.
- The benefit or loss on such contracts is only known at the time of transaction.
- They are not as stringent in their user agreement due to the subject matter of the contract.
- This is generally done in the same way as hedging and does not entail any upfront charge.
- Retail investors do not have easy access to forwards.
- The Forward contract markets are notoriously difficult to forecast.
Futures contract:
- The futures contracts are deals to purchase and sell a particular commodity at a particular price at a particular date in the future.
- A futures contract is a type of financial instrument that is standardized.
- These are marked-to-market daily contracts, which imply that regular adjustments are resolved day by day before the contract ends.
- Unlike forwards, they are traded on an exchange.
- They have clearance residences to ensure that the transactions are safe.
- All across trading day, rates are dictated by supply and demand.
- This is generally done in the same way as hedging and does not entail any upfront charge.
- Economic exposure is also lower in forwards than it is in currency futures.
- Futures are traded on the open market and shift over time from launch to expiration.
- 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:
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Discussion (1)
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Harshil Patel
Forward and futures contracts are basically contracts with few differences. No doubt it's quite risky to trade in both, but the profits they do offer are exponentially higher in many ways.