Difference between Forward Contract and Future Contract | What is forward contract and future contract with examples? | What is difference between forward contract and future contract?| Derivative Securities
What is forward contract and future contract with examples?
Forward Contract is a 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.
A future contract is a contract generally made on the trading floor of the future in which the parties agree to exchange the asset for cash at a fixed price and at a future specified date. A futures contract is standardized in terms of the quantity, date, and delivery of the item.
What is difference between forward contract and 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.||A futures 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.||A forward contract is a tailor-made contract which means they are customized according to the needs of the client.||A futures contract is a standardized contract where the conditions relating to quantity, date, and delivery are standardized.|
|3.||In the case of Forwarding contract, there is a high counterparty risk as compared to a futures contract.||In the case of Future contracts,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 the commodity|
|5.||There is no requirement of collateral in the case of the forward contract.||Some amount of initial margin is required in case of future contracts.|
|6.||Swap transactions are allowed in a forward contract.||Only direct transactions are allowed in the futures contract|
|7.||The purpose of the forward contract is to prevent loss through hedging.||The purpose of futures contracts is mainly to have speculative gain.|
|8.||A forward contract is traded on Over the Counter (OTC) i.e. there is no secondary market for such contracts.||Futures 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.|
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