Differences between a futures contract and a forward contract?

Answer 1

There are 3 different types of forward pricing: (1) Forward contracts (which include cash forward contracts, minimum price forward contracts and deferred pricing contracts) (2) Futures Contracts and (3) Option Contracts.

A forward contract is an agreement between two parties to buy or sell an asset at an agreed future point in time. The trade date and delivery date are separated.

A futures contract is a standardized forward contract that is traded on an exchange, like SAFEX.

Other than forward contracts, futures contracts are not linked with specific buyers. The intermediary between buyers and sellers is a clearing house that ensures that contracts held for delivery are fulfilled.

Options contract convey the right, but not the obligation, to buy (call option) or sell (put option) at a specified price during a specified period of time. The good traded in the market is not the actual commodity, but a futures contract. The farmer will receive a futures contract, which will carry an obligation to buy or sell at some specific future date, if he/she chooses to exercise the option.

Answer 2

Forwards Contract:

A forward contract is the simplest of the Derivative products. It is a mutual agreement between two parties, in which the buyer agrees to buy a quantity of an asset at a specific price from the seller at a future date. The Price of the contract does not change before delivery. These type of contracts are binding, which means both the buyer and seller must stay committed to the contract. This means they are bound to deliver or take delivery of the product on which the forward contract was agreed upon. Forwards contracts are very useful in hedging

Futures Contract:

A futures contract is an agreement to buy or sell an asset at a certain time in the future at a specific price. The Contractual terms of the futures contracts are very clear. The Futures market was designed to solve the shortcomings in the forwards contracts. Unlike forwards, futures are traded in organized exchanges. They also use a clearing house that provides the necessary protection to both the buyer and the seller. The price of the futures contract can change prior to delivery. Hence, both participants must settle daily price changes as per the contract values.

Difference:

Futures are traded in Organized Exchanges while Forwards are Over-The-Counter (OTC) traded

Answer 3

Two things.

A futures contract requires the person who will deliver the commodity to produce a certain amount of it at settlement. If you're dealing in wheat, you need to come up with 5000 bushels on a specific date.

That won't work very well if you're a farmer preselling your crop, because you really don't know how much wheat your crop will have in it or when it'll be dry enough to harvest. That's where forward contracts come in. They're like futures contracts, but they're more of a "when the crop's ready bring it in and I'll give you $6.40 per bushel for it."

The other difference is formality. There are fees for entering into a futures contract, fees for maintaining it and so on. You have to do things exactly when and how it says, or you're in default. A forward contract is a handshake deal.

Answer 4

Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell a specific type of asset at a specific time at a given price.

However, it is in the specific details that these contracts differ. First of all, futures contracts are exchange-traded and, therefore, are standardized contracts. Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement. Futures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never.

Secondly, the specific details concerning settlement and delivery are quite distinct. For forward contracts, settlement of the contract occurs at the end of the contract. Futures contracts are marked-to-market daily, which means that daily changes are settled day by day until the end of the contract. Furthermore, settlement for futures contracts can occur over a range of dates. Forward contracts, on the other hand, only possess one settlement date.

Lastly, because futures contracts are quite frequently employed by speculators, who bet on the direction in which an asset's price will move, they are usually closed out prior to maturity and delivery usually never happens. On the other hand, forward contracts are mostly used by hedgers that want to eliminate the volatility of an asset's price, and delivery of the asset or cash settlement will usually take place.

Answer 5

Options contracts give the option buyer the right, but not the obligation, to buy (if the contract is a Call Option) or sell (if the contract is a Put Option) a certain amount of a certain thing on or before a certain date. Maybe the contract is a put on 100 shares of Apple at $340 per share with June expiration. Apple was trading at $345 when I wrote this, so this option would protect against "downside risk"--the chance the stock might fall. (The same investor could also sell a call at $360 at the same time, which "locks in your profits.")

Futures contracts give the futures buyer the obligation to buy or sell a certain amount of a certain thing on a certain date. Most futures contracts are on commodities and most of them are bought by people who use whatever the underlying commodity is. If you are a large baking company (like the one that makes Wonder Bread) and you buy futures for October delivery on all the ingredients in your bread, you'll be able to tell your customers the October price for your products in June, so they can plan ahead.

Forward contracts are like futures in that they obligate the buyer to either buy or sell, but past that they're real flexible. Farmers buy these. A farmer wants to contract to sell his crop before he plants it so he knows how much per bushel he will make, but selling a futures contract on it would be bad--if his crop is bad he would have to buy on the open market to have enough to meet the futures contract; if the crop was really good he'd have some left over he'd have to sell on the open market. And if the crop came in late because of the weather, he's had it. So...the forward contract. He can sell a forward obligating him to sell his whole crop upon harvest, and not have to worry about it.

Answer 6

A forward contract is the simplest of the Derivative products. It is a mutual agreement between two parties, in which the buyer agrees to buy a quantity of an asset at a specific price from the seller at a future date. The Price of the contract does not change before delivery. These type of contracts are binding, which means both the buyer and seller must stay committed to the contract. This means they are bound to deliver or take delivery of the product on which the forward contract was agreed upon. Forwards contracts are very useful in hedging