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Derivatives trading involves a contract between parties to buy and sell assets at a given price and at a specific time. Companies and investors mainly use derivative contracts to hedge against risks or speculation. Futures and forwards are an example of derivative contracts whose value is derived from the underlying assets. These contracts are the same and follow similar fundamentals. However, there are certain differences between future and forward contact.

Meaning of Future Contract

A futures contract is a standardised financial contract under which the quantity and price are predetermined and payable at a future date. They are also called futures which can be traded in any segment, like stocks, commodities, currencies, etc., on a stock exchange. Furthermore, the parties are legally bound to execute the contract. The standardised terms and conditions of the futures contract include the following – 

  • Trade volume
  • Delivery date
  • Credit procedure
  • Other technical specifications.

Meaning of Forward Contract 

A forward contract is an agreement between two parties to buy or sell the underlying asset (stocks, commodities, etc.) at a specific price and at a specific time. Under this contract, you will know the profit or loss accrued at the time of settlement of the contract. Also, these contracts are not traded on a centralised exchange but are considered over-the-counter instruments. 

Future Contract vs Forward Contract

The following are the differences between future and forward contract – 

ParameterFuture ContractForward Contract
Trading on Stock ExchangeTradedNot traded
Type of ContractStandard contractCustomizable depending on buyer and seller needs
Initial MarginRequiredNot required
PurposeSpeculationHedging
Maturity DateStandardizedDepending on the transaction
Contract SizeStandardized Depends on the terms of the contract
PricingStandardized and transparent Opaque pricing as two parties dictate
TradingOn Stock exchangeOver the counter
Settlement Settled anytime during trading hours.Settled at a specific maturity date
Type of SettlementCash settlementDelivery of asset or cash settlement
RegulationRegulated by stock exchangesSelf-regulated
Clearing HouseInvolved in settlement of futures Not involved 
RiskLow counterparty riskHigh counterparty risk
Liquidity HighLow

Similarities Between Future and Forward Contract

The following are a few similarities between future and forward contract

  • Both contracts are the type of derivative contracts
  • It involves an agreement to buy or sell derivatives in the future.
  • These contracts help to mitigate risk and losses due to price fluctuations. 
  • Both contracts use assumption techniques to lock in the price.
  • Lastly, both these contracts require the buyer and seller to execute the transaction on a specific date. 

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Article Content
  1. Future Contract vs Forward Contract
  2. Similarities Between Future and Forward Contract