Answer to Question #311021 in Finance for Comfort

Question

Briefly describe three differences between futures and forwards [9 marks]

Answer 1

Differences between futures and forwards.

1. A forward contract refers to an agreement between two parties the buyer and the seller to trade an underlying asset at a certain price on a future date while a future contract refers to a binding contract where both parties agree to trade the asset at a fixed price at a specified date.
2. A forward contract is customizable because the terms are negotiated by both parties (the buyer and the seller) while a future contract the conditions relating to quantity, date and delivery are standardized.
3. In a forward contract the contract matures as per the contractual terms while in a futures contract the maturity of the contract is predetermined.
4. Forward contracts settle on maturity while in a future contract the profits and losses are settled on daily basis.