Similarities or Relationship between Forward Contract and Futures Contract
There is a close relationship between futures contract and forward contract in the foreign exchange market. A futures contract is an agreement to buy or sell an asset on a specified day in futures for a specified price. This is more or less similar to forward contract.
But there is a difference between futures contract and forward contracts. Futures contracts are traded on organized exchanges, using highly standardized rules. But, forward contracts, comparatively do not have such a rigid system and are informal agreements that vary according to the needs of the parties.
Differences between Forward contract and Futures contract
The following are some of the fundamental differences between forward and futures contracts.
1. Forward contract is an informal contract between the contracting parties whereas futures contract is standardized and according to specifications of futures exchange market.
2. There is no specific maturity date and it is as per the forward contract. In futures contract, maturity date is fixed which can be 3rd Wednesday of March, June, September or December.
3. All countries’ currencies are included, (especially of developed countries) in the forward contract transactions. But there is a limited to a small number of currencies in futures contract transaction.
4. No limit for the value of forward contract transactions. In futures contract, the value of transaction is restricted to Rs. 1 lakh Canadian dollars.
5. Prices quoted with difference between buying and selling rates in forward contract. In futures contract, only single price prevails on the exchange floor.
6. Forward contract are traded in a secondary market and dealt through banks while the other is a direct exchange market.
7. Margin money is very nominal in forward contract while Margin money is fixed by the amount involved in the futures contract.
8. No cash flow till delivery in forward contract. Daily settlement will be there in futures contract.
9. Swap transactions are allowed in forward contract. Only direct transactions are allowed in futures contract
10. There is no guarantor for forward contracts. But Futures exchange market has a guarantor.
11. The purpose of forward contract is to prevent loss through hedging. But the Purpose of futures contracts are mainly to have speculative gain.
12. Forward contracts are subject to Government regulations. Futures contracts are conducted by Futures market regulations.