Forward Contract vs. Futures Contract: Know the Difference
By Shumaila Saeed || Published on January 23, 2024
Forward Contract is a private, customizable agreement to buy or sell an asset at a specified price on a future date. Futures Contract is a standardized, exchange-traded contract to buy or sell an asset at a predetermined price at a specified time.
Key Differences
A forward contract is a private agreement between two parties to buy or sell an asset at a specified future date for a price agreed upon today. This contract is customizable and typically not traded on an exchange. A futures contract is a standardized agreement, traded on an exchange, to buy or sell an asset at a predetermined price at a future date. These contracts are standardized in terms of quality, quantity, and delivery time.
Shumaila Saeed
Jan 23, 2024
Forward Contract is less regulated, with terms negotiated privately between parties, leading to a higher risk of default. Futures Contract is highly regulated with standardized terms, reducing the risk of default.
Shumaila Saeed
Jan 23, 2024
Forward Contract is traded over-the-counter (OTC), often leading to less liquidity and higher credit risk. Futures Contract is traded on centralized exchanges, offering greater liquidity and lower credit risk.
Shumaila Saeed
Jan 23, 2024
Forward Contract is settlement occurs at the end of the contract, often with the physical delivery of the asset. Futures Contract is often settled before maturity, and settlement usually involves cash rather than physical delivery.
Shumaila Saeed
Jan 23, 2024
Forward Contract is often used by corporations for hedging specific risks and by investors with unique needs. Futures Contract is used by a wider range of market participants, including speculators and investors, for hedging and trading purposes.
Shumaila Saeed
Jan 23, 2024
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Comparison Chart
Regulation
Less regulated, higher default risk
Highly regulated, lower default risk
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Jan 23, 2024
Settlement
At contract end, often physical delivery
Before maturity, usually cash settlement
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Jan 23, 2024
Participants
Corporations, specific investors
Wide range, including speculators and investors
Shumaila Saeed
Jan 23, 2024
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Forward Contract and Futures Contract Definitions
Forward Contract
A non-standardized contract between two parties for future delivery.
To secure the future cost of raw materials, they signed a forward contract with their supplier.
Shumaila Saeed
Jan 09, 2024
Futures Contract
A legally binding agreement to trade an asset at a specified future date and price.
Futures contracts in oil were used to hedge against the volatility in oil prices.
Shumaila Saeed
Jan 09, 2024
Forward Contract
A financial instrument for OTC trading of assets on a future date.
The farmer used a forward contract to lock in the sale price of his crop.
Shumaila Saeed
Jan 09, 2024
Futures Contract
An exchange-traded contract with fixed terms for future transactions.
The investor purchased corn futures contracts anticipating an increase in market prices.
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Jan 09, 2024
Forward Contract
An agreement to buy or sell an asset at a future date at a price set today.
The company entered a forward contract to purchase oil at a fixed rate to avoid future price fluctuations.
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Jan 09, 2024
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Futures Contract
A market-standard contract for the future trade of commodities or financial instruments.
The fund manager used stock index futures contracts to manage portfolio risk.
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Jan 09, 2024
Forward Contract
A tailor-made agreement to exchange an asset at a specified future date and price.
To manage future price risks, the manufacturer entered into a forward contract for steel.
Shumaila Saeed
Jan 09, 2024
Futures Contract
A standardized contract to buy or sell an asset at a future date at a predetermined price.
Traders bought futures contracts in gold to speculate on its future price rise.
Shumaila Saeed
Jan 09, 2024
Forward Contract
A bespoke contract setting terms for the future sale or purchase of an asset.
The airline used a forward contract to hedge against the risk of rising fuel prices.
Shumaila Saeed
Jan 09, 2024
Futures Contract
A financial instrument for buying or selling assets on a future date on an exchange.
To diversify his portfolio, he traded in futures contracts on the stock exchange.
Shumaila Saeed
Jan 09, 2024
Repeatedly Asked Queries
What is a futures contract?
A futures contract is a standardized, exchange-traded agreement to buy or sell an asset at a set future date and price.
Shumaila Saeed
Jan 23, 2024
How do forward contracts differ from futures contracts in terms of trading venues?
Forward contracts are traded OTC, while futures contracts are traded on exchanges.
Shumaila Saeed
Jan 23, 2024
Are forward contracts customizable?
Yes, forward contracts are customizable according to the needs of the contracting parties.
Shumaila Saeed
Jan 23, 2024
Can forward contracts lead to higher default risk?
Yes, due to less regulation and the private nature of forward contracts, there's a higher risk of default.
Shumaila Saeed
Jan 23, 2024
Why do speculators use futures contracts?
Futures contracts are used by speculators for trading and hedging due to their liquidity and standardized terms.
Shumaila Saeed
Jan 23, 2024
What is a forward contract?
A forward contract is a private agreement to buy or sell an asset at a future date at a predetermined price.
Shumaila Saeed
Jan 23, 2024
Do futures contracts have standardized terms?
Yes, futures contracts are standardized in terms of quality, quantity, and delivery.
Shumaila Saeed
Jan 23, 2024
Who typically uses forward contracts?
Corporations and investors with specific needs often use forward contracts.
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Jan 23, 2024
How are futures contracts settled?
Futures contracts are often settled before maturity, usually through cash settlements.
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Jan 23, 2024
What kind of regulation applies to futures contracts?
Futures contracts are highly regulated with strict rules to reduce default risk.
Shumaila Saeed
Jan 23, 2024
What is the main use of futures contracts?
Futures contracts are used for hedging risks and speculative trading.
Shumaila Saeed
Jan 23, 2024
Can futures contracts help in portfolio diversification?
Yes, futures contracts can be used for diversification due to their wide range of underlying assets.
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Jan 23, 2024
What assets are commonly traded in forward contracts?
Commodities, currencies, and other financial instruments are common in forward contracts.
Shumaila Saeed
Jan 23, 2024
What happens if a party defaults on a forward contract?
In case of default, the affected party in a forward contract may seek legal recourse, but recovery can be uncertain.
Shumaila Saeed
Jan 23, 2024
Do forward contracts require an initial margin?
No, forward contracts typically do not require an initial margin.
Shumaila Saeed
Jan 23, 2024
What is the settlement process for forward contracts?
Forward contracts are usually settled at the end of the contract, often with physical delivery.
Shumaila Saeed
Jan 23, 2024
Is credit risk more prominent in forward or futures contracts?
Credit risk is more prominent in forward contracts due to their OTC nature.
Shumaila Saeed
Jan 23, 2024
Are forward contracts traded on exchanges?
No, forward contracts are not traded on exchanges but are over-the-counter agreements.
Shumaila Saeed
Jan 23, 2024
How do forward contracts handle price volatility?
Forward contracts lock in prices, helping parties hedge against future price volatility.
Shumaila Saeed
Jan 23, 2024
Can futures contracts be traded before their expiration?
Yes, futures contracts can be traded any time before their expiration on the exchange.
Shumaila Saeed
Jan 23, 2024
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About Author
Written by
Shumaila SaeedShumaila Saeed, an expert content creator with 6 years of experience, specializes in distilling complex topics into easily digestible comparisons, shining a light on the nuances that both inform and educate readers with clarity and accuracy.
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