Forward Contracts vs Futures Contracts

Last updated Mar 18, 2024

Futures contracts are traded on exchanges and the futures exchanges clear, settle, and guarantee all the transactions that occur on their exchanges. A futures exchange facilitates the trading process between buyers and sellers. The exchange serves as the buyer for every seller and the seller for every buyer of a futures contract, so traders in futures do not need to evaluate the creditworthiness of the party on the other side of the trade. In contrast, forward contracts are not traded on exchanges, and fulfillment of a forward contract is dependent on the creditworthiness of both parties.
Whereas forward contracts are individualized and the quantity and price are negotiated between the contracting parties, futures contracts are standardized. They are for standard quantities of the specified asset at a standardized price.
Unlike forward contracts, which are settled by the contracting parties on the expiration date by completing the buy-sell transaction for the contracted asset at the contracted price, usually buyers and sellers of futures contracts simply close out their positions by taking an offsetting position in a contract for the same asset before the delivery date.

the differences between forward contracts and futures contracts:

	Forward Contracts	Futures Contracts
Primary market	Dealers	Exchanges
Secondary market	None	Exchanges
Contract Terms	Negotiated for each contract, can be customized to each party’s needs	Standardized conditions
Closure of contract / or delivery	Asset is delivered to buyer at the expiration date of contact	Delivery is rare – positions are usually offset by delivery date
Collateral	None	Initial margin required
Credit risk	Dependent upon the parties in volved in the forward contract	None, because the exchange is counterparty to every trade, and the creditworthiness of the trad ers is replaced by that of the exchange
Market participants	Large firms only	Wide variety of firms