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?
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. | 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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