Futures Vs. Forwards
Both the futures contracts and forward contracts are a type of financial agreements between two parties to deliver a product or a commodity on a fixed sate in the future. However, both of these contracts are not completely same with each other. There are some key differences between futures vs. forwards and some of them are listed below. Please have a look at the same:
• The first key point of difference between futures and forwards is that futures contracts are always traded over a foreign currency trading exchange while in case of forwards contracts, they are always traded over the counter, or simply be a signed contract between two parties.
• The futures are highly standardized agreements and some of the forwards are unique in nature. The contracts are generally settled at different prices from the price which was there at the time of signing of the trade agreement.
• The futures contracts are get settled at the settlement price fixed on the last trading date of the contract. However, the forwards are settled by the delivery of the commodity at the specified contract price.
• The major point regarding futures vs. forwards is that the risk of credit in futures contracts is much lower than that of forwards contracts.
• The possible risk factor involved in the forwards contracts is that the supplier of the goods won’t be able to supply the grade and quantity of the commodity or the buyer won’t be able to pay for the commodities received at the time of the delivery.
• The point of difference between futures and forwards is that the forwards contracts specify the name of the party or the receiver to whom delivery should be made in case of a physical delivery. On the other hand in case futures contracts, the counterparty is chosen randomly by the exchange.
• In forwards contracts no cash flows take place before the delivery whereas, in case of futures contracts there are margin requirements.
• Another important point of difference in futures vs. forwards contract is that in case of forwards, the holder is free to exercise the contract, but on the other hand, both parties of the futures contracts must fulfill the contract on the settlement date.
We hope that the above points of differences regarding futures vs. forwards will help you in gaining better understanding about the two types of financial agreements.