Forwards and Futures

Only available on StudyMode
  • Download(s) : 55
  • Published : January 6, 2013
Open Document
Text Preview
Difference between futures market and forward market?
Forward market

Market dealing in commodities, currencies, and securities for future (forward) delivery at prices agreed-upon today (date of making the contract). In commodity and currency markets, forward trading is used as a means of hedging against sharp fluctuations in their prices. Future market

Definition
Market in which participants can buy and sell commodities and their future delivery contracts. A futures market provides a medium for the complementary activities of hedging and speculation, necessary for dampening wild fluctuations in the prices caused by gluts and shortages.

Forward Contract vs Futures Contract
Diffen › 
Finance
A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time at a pre-agreed price. A futures contract is a standardized contract, traded on afutures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. So while the date and price are decided in advance in forward contract, a futures contract is more unpredictable. They also differ in the forms that a futures contract is standardized while a forward contract is made to the customer's need. Standardization and exchange based trading of futures is the underlying reason for most of the differences between a forward and future transaction. Even though it may be intuitive that future trades are more constrained than forward trades and should hamper efficient markets, the standardization of the contracts stimulates futures market and enhances liquidity. In contrast to forward contracts in which a bank or a brokerage is usually the counterparty to the contract, there is a buyer and seller on each side of a futures trade. The futures exchange selects the contract it will trade. Comparison chart

Improve this chart| Forward Contract| Futures Contract|
Meaning:| A forward...
tracking img