Buying and selling the asset is a complex process without knowing the things. The futures contracts and forward contracts makes the traders buy the resource at a fixed price in the future. The agreement seems to be the same but, they are different. The main difference between the two is they both are not trades on the exchange.
Futures Contracts vs Forward Contracts
The main difference between the futures contract and the forward contract is the time of the registration. The Futures contracts 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 contracts 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 contracts is the 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 two parties agree on a specific resource to buy at the agreed rate at a specified time in the future. The contract contains the delivery date, agreed price, and some vital notes on the asset. The future agreement makes the lengthy position for the buyer, and the seller holds the short position.
The forward contracts is a nonstandard agreement. It has the term to transmit the agreement at any time. The forward contracts is to buy the resource at an assured time at the agreed price. It works on Over The Counter(OTC) method. The agreement is customized based on need. It can be sell in a decentralized market. The asset buys with the physical delivery of cash on the settlement date.
Comparison Between Futures Contracts and Forward Contracts
| 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 delivery date, Quality of resources, the amount agreed are the terms included in the futures contracts. It sells on the stock exchange. The two parties will make the future trade by their respective brokers. The trader has an option to exchange one currency for another at the date of settlement.
The futures agreement needs security assurance at the initial stage of the settlement. The futures contracts are like an auction. The amount quotes and the traders buy by the stock exchange. The government regulates futures contracts. The futures contracts needs to pay some amount at the initial stage. The initial margin risk in futures contracts will reduce the risk in the market.
The futures agreement has a low market risk, and you settle daily, whether profit or loss. Unlike a forward contracts, It has a fixed size of a document for a contract. The futures contracts is a public trade regulates by the government. It gets the institutional guarantee from the houses of government. It never gets expired. It is a standardized document. In simple, the futures contracts is for the speculation process.
What is Forward Contracts?
The forward contracts is a nonstandard agreement to buy the asset in the future. Forward the time in the agreement. A pre-fixed time for the settlement at a fixed price is the forward contracts. It has a high market risk compared to the futures contracts. The forward contracts has no perfect structure. It customizes according to the trader’s needs.
The forward contracts is transmitted to the traders directly, and it regulates by themselves. The forward contracts doesn’t need any security assurance in the initial stage. It has high market risk and no settlement guarantee. The agreement is between two different parties that cause the uncertainty in security till the maturity date. It is a private agreement between two separate parties. There is no standardized or second market for the forward contracts.
The forward contracts gets the institutional guarantee for the parties. It gets matured once it settles to the respective parties. There is no expiration date but depends on the transaction, expiration occurs. The forward contracts are for the hedging process. Since it is working on OTC(Over the counter) concept, it has a low range of liquidity. It has only one settlement at the end of the contracts.
Main Differences Between Futures Contracts and Forward Contracts
- The futures agreement needs security, and the forward contracts doesn’t want collateral.
- The futures contracts regulates by the stock exchange, and the forward contracts is self-regulated.
- The future contracts has high liquidity, and the forward contracts has low liquidity.
- The futures contracts needs to settle daily, and the forward contracts rectified on the settlement date.
- The futures contracts maturity is predetermined, and the forward contracts matured by terms of the agreement.
Conclusion
Both the futures contracts and forward contracts makes to buy the asset in the future. Both have their profits and losses. The futures contracts is secured compared to forward contracts. The futures contracts have low risk in the market. The forward contracts has high risk, and it needs no security in the agreement.
References
- https://www.sciencedirect.com/science/article/pii/0304405X81900040
- https://www.sciencedirect.com/science/article/pii/0304405X76900246