Both Futures and Forwards Contracts are agreements to trade or do a deal on a set future date, but there are some significant differences.1. 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.
2. 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.
3. 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.
4. 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.
