Question

contrast a forward contract with a future contract.In your disscussion comment on the historical development of each.Also point out the value of each contract and the obligation of holders of the contract in terms of payment and deliveries ,How does it relate with options,

Answer 1

Forward contract- It is an agreement between two parties to buy or sell an underlying at a pre -agreed time and at a specified price.

1. It is the customized contract that trades Over the counter.
2. Quantity, price and price of underlying are not fixed.
3. There is no initial margin required.
4. Forwards are privately traded.
5. They are not regulated by market or exchange.
6. In forward contract, there are chances of default, there is always counter party risk and risk of delivery of asset.
7. Forward contracts are settled at the end of the contract.

Futures contract- It is a legal agreement between two parties to buy or sell an underlying at a predetermined price and at a specific time in the future. It was firstly established by Chicago board of exchange in 1848, before that Japan established the earliest recognized futures trading exchange in 1710

1. It is the standardized contract that trades on exchange.
2. Quantity, time and price of underlying are fixed. Futures are publicly traded.
3. There is initial margin required.
4. They are regulated by exchange.
5. In futures contract, there is no chance of default, there is very less chance of counter party risk because these are regulated by exchange.
6. Future contracts are settled daily, that is called mark-to-market.