Difference between Forward Contract and Futures Contract
Basis |
Forward Contract |
Futures Contract |
---|---|---|
Trading Venue |
Forward contracts are negotiated directly between the people involved, without using an exchange. |
Futures contracts are traded on organized exchanges where buyers and sellers meet to make deals. |
Customization |
In forward contracts, parties can agree on specific terms that suit their needs. |
Futures contracts have set terms decided by the exchange, so there’s less room for personalization. |
Regulation |
Forward contracts are less regulated by the government compared to futures contracts, which have strict rules set by the exchange. |
Futures contracts are closely watched by the exchange to ensure everyone follows the rules. |
Risk |
Forward contracts have a higher chance of one party not keeping their promise because there’s less control. |
Futures contracts are safer because the exchange makes sure everyone does what they agreed to. |
Settlement |
In forward contracts, people settle their deal at the end of the contract. |
Futures contracts settle every day based on how the market is doing. |
Liquidity |
Forward contracts are harder to buy and sell because there aren’t as many people trading them. |
Futures contracts are easy to buy and sell because they’re traded on exchanges with lots of activity. |
Ease of Entry/Exit |
It’s not as easy to start or stop using forward contracts because they’re private and don’t have a big exchange platform. |
Futures contracts are simple to start or end because the exchange handles everything, making transactions quick and easy. |
Difference between Forward Contract and Futures Contract
In finance, forward and futures contracts are essential tools for managing risk and speculating on future price movements. While both involve agreements to buy or sell assets at a predetermined price on a future date, they have significant differences. Forward contracts are privately negotiated between parties and offer customization options, while Futures contracts are traded on exchanges with standardized terms.