Difference between Forward Contract and Future Contract
BBA | BBA -BI | BBA-TT | BBS | BBM
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.
|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.|