Question

In: Finance

Discuss the difference between forward and future market

Discuss the difference between forward and future market

Solutions

Expert Solution

A future contract is an agreement between a buyer and seller to buy or sell an asset at a certain time in the future for a certain price.
Similarly, a forward contract is also an agreement to buy or sell an asset at a particular time in the future for a certain price.
The difference between forward and future contract are as follows:
Forward Future
It is Private contract between two parties and is traded in over the counter market Future contracts are traded on an exchange
Forward contract asset size and type are not standardized A future contract is standardized
Gain or loss is realized at the maturity of the contract Daily settlement of gain and losses i.e. marked to market
Delivery of the asset usually takes place The contract usually closes before the maturity
It has usually one specific delivery date It can have a range of delivery date
There is a risk of default by the counterparty There is no risk of default as the counterparty is the exchange

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