How are futures different from forwards?
A The basic difference is that while forward contracts are customised, futures contracts are standardised. A customised contract means that Mr X and Mr Y can enter into it on the basis of mutual needs, and there is no one else to determine the terms of their contract. In futures, on the other hand, the stock exchange offers certain fixed/standardised contracts for investors to pick up and trade. Thus, unlike Mr X and Mr Y, who have the freedom to enter into a contract for any length of time, in futures investors have to choose from the series of contracts offered for various durations. For example, one month, two months, three months. In a forward market, both buyer and seller deal with each other, while in futures market, both buyers and sellers are faceless. Both deal with the exchange and exchange in turn assures performance of the contract. Default risk is very high in forward contracts while in futures contracts the exchange takes ensures performance of the contract.
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