Futures contracts vs. Forward contracts
A futures contract, often referred to as futures, is a standardized version of a forward contract that is publicly traded on a futures exchange (CME, LME etc.). Like a forward contract, a futures contract includes an agreed upon price and time in the future to buy or sell an asset, usually stocks, bonds, or commodities, like gold, crude oil, AAPL.
A forward contract is a customized contractual agreement where two private parties agree to trade a particular asset with each other at an agreed specific price and time in the future. Forward contracts are traded privately over-the-counter, not on an exchange.
|Definition||A 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.||A 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.|
|Structure & Purpose||Customized to customer needs. Usually no initial payment required. Usually used for hedging.||Standardized. Initial margin payment required. Usually used for speculation.|
|Transaction method||Negotiated directly by the buyer and seller||Quoted and traded on the Exchange|
|Market regulation||Not regulated||Government regulated market (the Commodity Futures Trading Commission or CFTC is the governing body)|
|Institutional guarantee||The contracting parties||Clearing House|
|Risk||High counterparty risk||Low counterparty risk|
|Guarantees||No guarantee of settlement until the date of maturity only the forward price, based on the spot price of the underlying asset is paid||Both parties must deposit an initial guarantee (margin). The value of the operation is marked to market rates with daily settlement of profits and losses.|
|Contract Maturity||Forward contracts generally mature by delivering the commodity.||Future contracts may not necessarily mature by delivery of commodity.|
|Expiry date||Depending on the transaction||Standardized|
|Method of pre-termination||Opposite contract with same or different counterparty. Counterparty risk remains while terminating with different counterparty.||Opposite contract on the exchange.|
|Contract size||Depending on the transaction and the requirements of the contracting parties.||Standardized|
|Market||Primary & Secondary||Primary|