For an intro to forward contracts, watch this video from Khan Academy. The contract may be fulfilled either via delivery of the underlying asset or a cash settlement for an amount equal to the difference between the market price and the price set in the contract i.e., the difference between the forward rate specified in the contract and the market rate on the date of maturity. For example, if the market price of the underlying asset is higher than the price agreed in the forward contract, the seller loses. There is usually a clear "winner" and "loser" in forward contracts, as one party will profit at the point of contract maturity, while the other party will take a loss. No cash or assets change hands until the maturity date of the contract.
Since it is a private contract, it is not traded on an exchange but over the counter. In a forward contract, the buyer and seller are private parties who negotiate a contract that obligates them to trade an underlying asset at a specific price on a certain date in the future. Counterparty risk remains while terminating with different counterparty.ĭepending on the transaction and the requirements of the contracting parties.
Opposite contract with same or different counterparty. The value of the operation is marked to market rates with daily settlement of profits and losses.įorward contracts generally mature by delivering the commodity.įuture contracts may not necessarily mature by delivery of commodity. No guarantee of settlement until the date of maturity only the forward price, based on the spot price of the underlying asset is paidīoth parties must deposit an initial guarantee (margin). Government regulated market (the Commodity Futures Trading Commission or CFTC is the governing body) Negotiated directly by the buyer and seller Comparison chart Forward Contract versus Futures Contract comparison chartĪ forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time at a specified price.Ī futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price.Ĭustomized to customer needs.
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