Difference between Forward Contract and Future Contract
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Finance
Management Notes
Forward Contract is an private agreement between two parties where one party agrees to buy and sell the underlying asset or commodity at a specified price on a specific future date.In simple words we can say that a forward contract is one of the simplest forms of derivatives where the contract value depends on the spot or market price of the underlying asset.
Future contract is a contract generally made on the trading floor of future in which the parties agree to exchange the asset for cash at a fixed price and at a future specified date.A future contract is a standardized in terms of the quantity, date, and delivery of the item.
S.No. |
Forward Contract |
Future Contract |
| 1. | Forward Contract is an agreement between two parties to buy and sell the underlying asset at a certain price on a future date. | Future contract is a binding contract whereby the parties agree to buy and sell the asset at a fixed price and a future specified date. |
| 2. | Forward contract is a tailor made contract which means they are customized according to the needs of the client. | Future contract is a standardized contract where the conditions relating to quantity, date, and delivery are standardized. |
| 3. | In case of Forward contract ,there is a high counterparty risk as compared to a futures contract. | In case of Future contract ,there is a low counterparty risk as compared to a forward contract. |
| 4. | Forward contracts generally mature by delivering the commodity. | Future contracts may not necessarily mature by delivery of commodity |
| 5. | There is no requirement of collateral in case of forward contract. | Some amount of initial margin is required in case of future contract. |
| 6. | Swap transactions are allowed in forward contract. | Only direct transactions are allowed in futures contract |
| 7. | The purpose of forward contract is to prevent loss through hedging. | The purpose of futures contracts are mainly to have speculative gain. |
| 8. | Forward contract is traded on Over the Counter (OTC) i.e. there is no secondary market for such contracts. | Future Contracts are traded on an Organized securities exchange. |
| 9. | Forward contracts are settled on a maturity date ie; at the end of the contract. | Future contracts are settled on a daily basis, i.e. the profit or losses are settled daily. |
| 10. | Forward contracts are self-regulated. | Futures contracts are regulated by the securities exchange. |
