Both Futures and Forwards Contracts are agreements to trade or do a deal on a set future date, but there are some significant differences.
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.
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
Forwards – Very high counterparty risk
Futures – Low risk
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.
Forwards – Contracting parties
Futures – Clearing House
Forwards – Depending contracting parties, transaction and requirements
Futures – Fully standardized
Forwards – Depends on the transaction and other factors
Futures – Standardized
Forwards – Can be negotiate directly by the buyer and seller
Futures – Quoted and traded on the Exchange
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.