True or False: Futures are customizable contracts while Forwards are not. True False

True or False: Futures are customizable contracts while Forwards are not.

True

False

Expert Solution

No, the statement "Futures are customizable contracts while Forwards are not" is false. In order to understand this we need to understand the meaning of forward and future contracts.

A forward contract is an agreement between a uyer and seller to trade on an asset on a future date. Therefore here both the parties are responsible for fixing the terms and conditions of the contract. Moreover the forward contract matures on the day as per the contract, which is the final settlement date.

In this case as both parties can decide about the terms and conditions of the contract, so the forward contract is a customized contract on which both the parties can fix their own conditions and the agreement settles at the end of the agreement period. This type of contract carries risk as this contract remains between only two parties that is the buyer and the seller and there is private agreement.

Future contract on the other hand are uncustomizable contract in which both the buyer and seller come into a standardized agreement in which all the terms and conditions are fixed and cannot be customized.

As the future contract is traded on exchange, therefore there are more safer and this contract settles at the end of the agreement period. This type of contract is the one which exists in a standard form as the contract trades on the exchange, so the parties involved in the agreement cannot add their own specified terms and conditions as can be done in the forward contract.

So, we can learn here that Forward contract is customizable contract and future contract is not a customizable contract between the parties involved in the contract.

jeff jeffy answered 1 year ago

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