Forward Contract vs Futures
A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time at a pre-agreed price.
A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. So while the date and price are decided in advance in forward contract, a futures contract is more unpredictable.
They also differ in the forms that a futures contract is standardized while a forward contract is made to the customer’s need.
Standardization and exchange
based trading of futures is the
underlying reason for most of the differences between a forward and future transaction. Even though it may be intuitive that future trades are more constrained than forward trades and should hamper efficient markets, the standardization of the contracts stimulates futures market and enhances liquidity.
In contrast to forward contracts in which a bank or a brokerage is
usually the counterparty to the
contract, there is a buyer and
seller on each side of a futures
trade. The futures exchange selects the contract it will trade.