Question

What is the difference between the forward contracts and future contracts?

Answer 1

(1) Futures Contracts are Exchange Traded(Publicly Traded) while Forward Contrats are Over the Counter Contracts(Private Contracts).

(2)  Forwards are Customized to customer needs. Usually no initial payment required for this Contracts. They are Usually used for hedging. While Futures are Standardized (as they are Exchange regulated). Initial margin payment required. Usually used for speculation.

(3) Forwards are negotiated directly between buyer and seller, while futures are Quoted and traded on the Exchange.

(4) Forwards are not regulated hence high counter party risk exists, while Futures are Regulated by stock exchanges and hence there will be no or low counterparty risk as Counter party here is Clearing House.

(5) In case of Forwards Contract Size Depends on the transaction and the requirements of the contracting parties, while futures are Standardized.

(6) In case of Forwards, No guarantee of settlement until the date of maturity only the forward price, based on the spot price of the underlying asset is paid while in case of futures Both parties must deposit an initial guarantee (margin). The value of the operation is marked to market rates with daily settlement of profits and losses.

(7) Forward contracts generally mature by delivering the commodity. Future contracts may not necessarily mature by delivery of commodity.

(8) As forwards are Over the Counter Contracts Depending on the transaction, while Futures are traded in lots and lot size is Standardized.