Forward Contracts Definition & Comparison to Futures Contracts

    What is a Forward Contract?

    Similar to a futures contract, a forward contract is an agreement for the future delivery of a specified amount of goods at a predetermined price and date.

    What is a Forward Contract?

    Similar to a futures contract, a forward contract is an agreement for the future delivery of a specified amount of goods at a predetermined price and date.

    How do Futures & Forward Contracts Differ?

    Forward contracts are usually not standardized as futures are; they are traded over the counter directly between buyer and seller. Futures contracts, on the other hand, are standardized and traded on organized exchanges.

    Another key difference between a futures and forward contract is in the delivery of the underlying asset. Futures contracts are typically not meant for actual delivery of an asset. In reality, about 2% of futures contracts actually require delivery. Conversely, forward contracts are meant for delivery. This delivery is usually in the form of cash settlement as opposed to physical delivery.

    Forward contracts are settled at the expiration of the contract; alternatively, futures are marked to market. This means that the daily changes in the price of the futures contracts are settled daily until the contract expires.

    One other key distinction to make between futures and forward contracts is in the credit risk that is inherent in forwards. Since either party of a forward contract can default on their obligation to take delivery or to deliver an asset, forwards are more risky than futures. As noted above, futures are traded on exchanges, backed by clearinghouses which will guarantee the futures contract.

     

    Tim Ord
    Ord Oracle

    Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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