Difference between Forwards and Futures
Futures are similar to forwards. However, there are certain differences between
two. The following are the important points of differences between forwards and futures
Futures
- Standardised contracts.
- Valuation (or settlement) is done on a daily basis (marked to market basis).
- Margins are required (requires guarantee deposits from the parties).
- Transaction is done through a clearing house.
- Traded in organized stock exchanges (futures exchanges).
- Default risk is considerably reduced (there is a margin as guarantee deposit).
- More liquid.
- Rarely closed. Buyer and sellers normally revise their positions to close the deals (only about 1% of the contracts are settled through delivery).
- Settled daily.
Forwards
- Customised or tailor – made contracts.
- Settlement is made on the pre – specified date of maturity.
- Margins are not required.
- There is no clearing house. It is only a bilateral (between buyer and seller) agreement.
- Not traded in organized stock exchanges (traded on phone or telex).
- Default risk is higher.
- Less liquid.
- Contracts are generally closed (closed on actual delivery and payment) (over 90% contracts are settled by delivery).
- Settled at the period end.
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