Difference between Forward Contract and Future Contract – Finance | Management Notes

Difference between Forward Contract and Future Contract
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.


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.

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