What is the difference between Forward contracts and Futures contracts ?
Futures is a type of forward contract. • Standardized Vs Customized Contract – Forward contract is customized while the future is standardized. To be more specific, the terms of a Forward Contracts are individually agreed between two counter-parties, while Futures being traded on exchanges have terms standardized by the exchange. • Counter party risk – In case of Futures, after a trade is confirmed by two members of exchange, the exchange / clearing house itself becomes the counter-party (or guarantees) to every trade. The credit risk, which in case of forward contracts was on the counter-party, gets transferred to exchange / clearing house, reducing the risk to almost nil. • Liquidity – Futures contracts are much more liquid and their price is much more transparent due to standardization and market reporting of volumes and price. • Squaring off – A forward contract can be reversed only with the same counter-party with whom it was entered into. A Futures contract can be reversed with a
Futures is a type of forward contract a. Standardized Vs Customized Contract – Forward contract is customized while the future is standardized. To be more specific, the terms of a Forward Contracts are individually agreed between two counter-parties, while Futures being traded on exchanges have terms standardized by the exchange. Counter party risk – In case of Futures, after a trade is confirmed by two members of exchange, the exchange / clearing house itself becomes the counter-party (or guarantees) to every trade. The credit risk, which in case of forward contracts was on the counter party, gets transferred to exchange/clearing house, reducing the risk to almost nil. b. Liquidity – Futures contracts are much more liquid and their price is much more transparent due to standardization and market reporting of volumes and price. c. Squaring off – A Forward contract can be reversed only with the same counter-party with whom it was entered into. A Futures contract can be reversed with any
