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What is the difference between forward contract and futures contract?


A forward contract is an agreement between two parties to buy or to sell an asset at a specified price on a future date. For example, in foreign exchange market ‘forward contract’ means an exchange agreement between two parties to deliver one currency in exchange for another currency at a forward or future date.

Futures are exchange traded contracts made between two parties to buy or sell a specified commodity, foreign currency or a financial instrument at a pre-determined price on a fixed future date. In fetures, the price of a commodity or a financial instrument (ex: shares of a company) already fixed by the buyer and seller on the date of the contract, with a condition that it should be delivered to the buyer on a future date (delivery date). The future contracts are traded in the futures exchange.

Both forward contract and future contract are similar in nature. The main difference between the two is that the forward contracts are privately negotiated whereas the futures contracts are standardized and traded on an exchange. Futures are traded on organized exchanges whereas the Forwards are bilateral contract traded over the counter. The contract of futures can be reversed with any member of the Exchange, but in the forward contract, the contract can be squared off only with the same counterparty with whom the contract was originally entered into.

 

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