Question

Explain basic differences between the operation of currency forward contracts and currency futures contracts? In details with examples

Answer 1

Basic difference between operation of currency forward and currency futures as follows-

A. There is a high degree of counterparty risk in currency forwards whereas there would be a low degree of counterparty risk in currency futures.

B. Currency futures are generally standardised contracts whereas currency forwards are generally customised contracts and they can be customised according to the need of the user.

C.currency futures are constantly traded on the currency exchanges and their rate are continuously discovered where as currency forwards are not continuously traded on the stock exchange and they are over the counter exchange mechanism

D.there is a low degree of transparency in currency forwards where is there is a high degree of transparency in currency futures

E.currency forwards are generally provided on the over-the-counter exchange whereas currency futures will be traded on the stock exchanges.

we can example the currency forward through when we are taking a forward position in over the counter market with another party and there is a high level of counterparty risk whereas we have to trade currency futures on the regulated currency market and we will be deriving the rate out of the demand and supply continuously.