Q&A: How is a future contract different from a forward contract?

A: A futures contract is a forward contract with some additional features, mainly in the institutional settings in which they trade.
  • Futures contracts always trade on an organized exchange.
  • Futures contracts are always highly standardized with specified underlying goods, quantity (contract size), delivery date, trading hours and trading area. Forward contracts are customized and therefore usually do not trade after being created.
  • Performance on futures contract is guaranteed by a clearing house: every trader in the futures markets has obligations only to the clearing house, and the clearing house guarantees fulfillment of the contract of the trading parties. Traders in the forward market have direct obligations to each other (ie. credit risk)
  • All futures contracts are settled daily. forward contracts are typically settled at expiration.
  • Futures markets are regulated by an identifiable government agency, while forward contracts in general trade in an unregulated market. A futures transaction must be reported to: the futures exchanges, the clearinghouse, and at least one regulatory agency.

Category: C++ Quant > Derivatives


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