Comparison of forward and futures contracts

Comparison of forward and futures contracts.

Forward Futures
Private contract between two parties Traded on an exchange
Not standardized Standardized contract
Usually one specified delivery date Range of delivery dates
Settled at end of contract Settled daily
Delivery or final cash settlement takes place usually closed out prior to maturity
Some credit risk Virtually no credit risk

Futures Contract

futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price. Unlike forward contracts, futures contracts are normally traded on an exchange. To make trading possible, the exchange specifies certain standardized features of the contract. As the two parties to the contract do not necessarily know each other, the exchange also provides a mechanism that gives the two parties a guarantee that the contract will be honored.