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….
- Futures are traded only on organized exchanges. Forward contracts are traded in decentralized markets.
- Futures contracts are standardized. Forward contracts are tailored to meet the needs of a specific transaction.
- Trading in futures is formalized under exchange rules that govern trading.
- 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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