Buying and selling the asset is a complex process without knowing the things. The futures contracts and forward contracts make the traders buy the resource at a fixed price in the future.
Key Takeaways
- Futures contracts are standardized and traded on exchanges, while forward contracts are customized and traded over the counter.
- Futures contracts have lower counterparty risk and are more liquid than forward contracts.
- Futures contracts require margin payments, while forward contracts do not.
Futures Contracts vs Forward Contracts
The difference between the futures contract and the forward contract is the time of registration. The Futures contract is an agreement between the two to buy the asset at a specific rate and time in the future. The forward contract is the agreement between two to obtain the resource at a manifest rate and time in the future. A futures contract is a standard contract. It means the seller and buyer can’t negotiate the agreement. The forward contract is the tailor contract means the deal can be transmitted.
The futures contract is a conventional contract. Bind at one time and execute at some other time. It is a deal to acquire the asset at a particular rate and time.
The forward contract is a nonstandard agreement. It has the term to transmit the agreement at any time. The forward contract is to buy the resource at an assured time at the agreed price.
Comparison Table
| Parameters of comparison | Futures contracts | Forward contracts |
|---|---|---|
| Collateral | The futures agreement needs security. | The forward contracts doesn’t need collateral. |
| Regulation | The futures contracts regulated by the stock exchange | The forward contracts is self-regulated. |
| Liquidity | The futures contracts has high liquidity | The forward contracts has low liquidity. |
| Settlement | The futures contracts needs to settle daily. | The forward contracts settles on the settlement date. |
| Maturity | The futures contracts maturity is predetermined. | The forward contracts matured by terms of the agreement. |
| Size of contract | The futures contracts has a fixed size. | Depend on the terms, the size varies in the forward contract. |
What is Futures Contracts?
The standardized document referred to the future. The agreement makes to buy the asset in the future at a fixed amount at a specific time.
The futures agreement needs security assurance at the initial stage of the settlement. The futures contracts are like an auction. The amount quoted and the traders buy by the stock exchange.
The futures agreement has a low market risk, and you settle daily, whether profit or loss. Unlike forward contracts, It has a fixed-size of document a contract.
What is Forward Contracts?
The forward contract is a nonstandard agreement to buy the asset in the future. A pre-fixed time for the settlement at a fixed price is the forward contract.
The forward contracts are transmitted to the traders directly and it regulates by themselves. The forward contracts don’t need any security assurance in the initial stage.
The forward contracts get the institutional guarantee for the parties. It gets matures once it settles with the respective parties. There is no expiration date, but depending on the transaction, expiration occurs.
Main Differences Between Futures Contracts and Forward Contracts
- The futures contracts need to settle daily, and the forward contracts rectified on the settlement date.
- The futures contract’s maturity is predetermined, and the forward contracts mature by the terms of the agreement.
- https://www.sciencedirect.com/science/article/pii/0304405X81900040
- https://www.sciencedirect.com/science/article/pii/0304405X76900246
Last Updated : 14 August, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
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