Posted by: usset001 | May 31, 2013

The Difference between Futures and Forward Contracts

Let’s talk about two types of transactions that many people confuse; forward and futures contracts. They sound similar, but they are distinctly different contracts in terms of where and how they are traded. The key differences include….

  1. Futures are traded only on organized exchanges. Forward contracts are traded in decentralized markets.
  2. Futures contracts are standardized. Forward contracts are tailored to meet the needs of a specific transaction.
  3. Trading in futures is formalized under exchange rules that govern trading.
  4. Futures contracts are usually not satisfied by delivery (roughly 1% of futures contracts traded end in delivery). Forward cash contracts end in delivery.

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