Difference between Forward Contract and Future Contract

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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