At a basic level, futures are also forwards but in a more organized and regulated form that are executed through exchange. The exchange acts a guarantee to any counter-party risk. To summarize, the main differences between forwards and futures are
1. Futures are insured against counter-party risk whereas in forwards counter-party risk is the major risk.
2. Futures are traded on an exchange whereas Forwards are traded over the counter.
3. Futures are standardized financial instruments and the structure is not altered for the sake of investors. Forwards are tailor made and can be structured according to the parties invlolved. For example, futures are available for a selected expiry dates whereas forwards can be structured for any specific period of epxpiry.
4. Futures are more liquid compared to Forwards as the participants involved in futures market are more.
5. Futures are tradable whereas forwards are contracts between two parties and hence are not transferrable.
6. In futures the balance is settled everyday (also called mark to market settlement), whereas in forwards, the balance is settled at a time (in most of the cases, at the end of the expiry of the contract).
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Pankaj Priyadarshi
Pankaj Priyadarshi is an author at Lastbull.com. He has 11 years of international and domestic experience in the areas of Finance, Management, and Business Analysis in the USA and India.He is a co-founder of 'Vertical Grass', a consulting initiative in the area of finance. A Graduate from IIT(Engineering) and ISB(Management).
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