What is the difference between Forward contracts and futures contarcts?
Futures is a form of forward contract Standardized Vs Customized Contract- Forward Contracts is customised while the future is standardised. The terms of a Forward Contracts are individually agreed between two counter-parties, while Futures being traded on exchanges haver terms standardised by the exchange. Counter party risk – In case of Futures, after a trade takes place with in two members of exchange, the exchange / clearing house itself becomes the Counter Party to every trade. It acts as a performance guarantor. The credit risk, which in case of farward contracts was on the counter party, gets transferred to exchange / clearing house, reducing the risk to almost nil. Leverage – When a trader takes a futures position (long or short) he is required to deposit with his broker an initial margin set by the exchange, which depends on the price volatility at the time but is typically around 5% of the value of the contract. Liquidity – Being exchange traded Futures contracts very liquid
