Futures and Forward contracts

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Definition: Futures and Forward contracts

Both, future contract and forward contract is a standardized contract between two parties to exchange a commodity/asset at a decided price (strike price) at a specific time in future. However there are certain differences between the two:

Future contracts are standardized contracts and are traded on the stock market. Forward contracts are customized agreements between tow private parties. Since they are not standardized they are not traded on the stock market and hence are more risky and prone to default.

Future contracts are also settled on a daily basis. In other words, they are marked to market daily. However, forward contracts are settled between the two parties at the end of the contract period only.

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