Distinguish Between Futures and Forward Contract

Topics: Futures contract, Forward contract, Derivative Pages: 3 (798 words) Published: April 6, 2013
Distinguish between futures and forward contract
Futures contract
A futures contract is a contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts feature the quality and quantity of the underlying asset, they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. Futures contract are standardized. They have initial margin payment requirements. Futures are quoted and traded on the Exchange. They are government regulated and involved low counterparties risks. 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. Future contracts may not necessarily mature by delivery of commodity. Contract size and expiry date of futures contracts are standardized. Forward contract

A forward contract is a cash market transaction in which delivery of the commodity is deferred until after the contract has been made. Although the delivery is made in the future, the price is determined on the initial trade date. Most forward contracts don't have standards and aren't traded on exchanges. For example, a farmer would use a forward contract to "enclose" a price for his grain for the upcoming fall harvest. Forward contracts are mostly tailor made which are customized to customers need, usually no initial payments are required. They have a typical transactional method, negotiations are made directly by the buyer and seller. Forwards contracts are not regulated and they involve high counterparty’s risks. There exists no guarantee of settlement until the date of maturity,...
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