Futures and Forwards Contracts

Both Futures and Forwards Contracts are agreements to trade or do a deal on a set future date, but there are some significant differences.

• Futures are highly standardized and should follow the standards, while each and every Forward contract is personalized and unique between the parties interact with the trade or deal.

• Futures are settled at the end with the details final price; whereas etc on the last trading date of the contract while the Forwards are already settled at the start with a forward price.

• The Futures contract does not specifically mention to whom the delivery of a physical asset must be made; but in a Forwards contract it is clearly specified and stated who receives the delivery.

• Futures are always traded on an exchange, while Forwards are traded over-the-counter.

 

What are the Benefits of a Futures Contract?
A Futures Contract is a unique and personalized investment among the other alternative investments. It has few remarkable characteristics that make it more attractive to the investors.

• Simple and uncomplicated – Futures contracts are very easy to follow and it is based on your thoughts of whether the prices are going to rise or fall and you sell and buy.

• Easy to short sell – There is no paper work or any high financial requirements to be met and it is a very logical strategy to follow.

• Easy transaction entry and exit – It is very easy to enter and exit a transaction.

• Investment opportunities – A Futures Contract helps you to invest directly in the market and no factors like management issues, market shares to be considered.

Structure:
Forwards – Customized according to the customer’s need and no initial payment required.
Futures – Standardized. Initial margin payment is a must.

Method of pre-termination:
Forwards – Opposite contract with same or different counterparty and counterparty risk remains while terminating with different counterparty.
Futures – Opposite contract on the exchange

Risk:
Forwards – Very high counterparty risk
Futures – Low risk

Market regulations:
Forwards – Not regulations
Futures – Government regulated market

What is it?:
Forwards – An agreement between two parties to buy or sell an asset at a pre-agreed point in time.
Futures – A standardized contract traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price.

Institutional guarantee:
Forwards – Contracting parties
Futures – Clearing House

Contract size:
Forwards – Depending contracting parties, transaction and requirements
Futures – Fully standardized

Expiry date:
Forwards – Depends on the transaction and other factors
Futures – Standardized

Transaction method:
Forwards – Can be negotiate directly by the buyer and seller
Futures – Quoted and traded on the Exchange

Guarantees:
Forwards – No guarantee of settlement until the date of maturity.
Futures – Both parties must deposit a marginal guarantee. The value of the operation is underlying market rates that settle profits and losses in a daily basis.

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