A forward contract is a contract whose terms are tailor-made i.e. negotiated between buyer and seller. It is a contract in which two parties trade in the underlying asset at an agreed price at a certain time in future. It is not exactly same as a futures contract, which is a standardized form of the forward contract. A futures contract is an agreement between parties to buy or sell the underlying financial asset at a specified rate and time in future.
While a futures contract is traded in an exchange, the forward contract is traded in OTC, i.e. over the counter between two financial institutions or between a financial institution or client.
As in both the two types of contract the delivery of the asset takes place at a predetermined time in future, these are commonly misconstrued by the people. But if you dig a bit deeper, you will find that these two contracts differ in many grounds. So, here in this article, we are providing you all the necessary differences between forward and futures contract so that you can have a better understanding about these two.
|BASIS FOR COMPARISON||FORWARD CONTRACT||FUTURES CONTRACT|
|Meaning||Forward Contract is an agreement between parties to buy and sell the underlying asset at a specified date and agreed rate in future.||A contract in which the parties agree to exchange the asset for cash at a fixed price and at a future specified date, is known as future contract.|
|What is it?||It is a tailor made contract.||It is a standardized contract.|
|Traded on||Over the counter, i.e. there is no secondary market.||Organized stock exchange.|
|Settlement||On maturity date.||On a daily basis.|
|Default||As they are private agreement, the chances of default are relatively high.||No such probability.|
|Size of contract||Depends on the contract terms.||Fixed|
|Collateral||Not required||Initial margin required.|
|Maturity||As per the terms of contract.||Predetermined date|
|Regulation||Self regulated||By stock exchange|
2 thoughts on “Distinction between Futures and Forward”