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Forward Contract vs. Futures Contract: What's the Difference?

Edited by Huma Saeed || By Sara Rehman || Published on February 5, 2024
A forward contract is a customized, non-standardized agreement between two parties to buy/sell an asset at a future date, while a futures contract is a standardized, exchange-traded agreement for the same purpose.

Key Differences

A forward contract is a private agreement between two parties to buy or sell an asset at a predetermined future date and price. In contrast, a futures contract is a standardized agreement traded on an exchange, also stipulating the sale or purchase of an asset at a future date and price.
Sara Rehman
Feb 05, 2024
Forward contracts are customizable, tailored to the needs of the contracting parties, and typically involve commodities, currencies, or financial instruments. Futures contracts, being standardized, have set terms and features, and are commonly used for commodities, currencies, and financial indexes.
Huma Saeed
Feb 05, 2024
Risk and regulation differ significantly; forward contracts, being private and non-standardized, carry higher counterparty risk and are lightly regulated. Futures contracts, traded on exchanges, are subject to stringent regulatory oversight, reducing counterparty risk.
Sara Rehman
Feb 05, 2024
In a forward contract, the settlement occurs at the end of the contract term, and the contract is generally held to maturity. Futures contracts, however, often involve daily settlement and can be closed out before the contract's expiry.
Aimie Carlson
Feb 05, 2024
Forward contracts are mainly used for hedging specific risks and have no secondary market, whereas futures contracts are used for both hedging and speculation and are traded actively on secondary markets.
Sara Rehman
Feb 05, 2024
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Comparison Chart

Standardization

Customized, non-standardized.
Standardized terms and conditions.
Sara Rehman
Feb 05, 2024

Trading Venue

Over-the-counter (private).
Traded on an exchange.
Sara Rehman
Feb 05, 2024

Counterparty Risk

Higher due to lack of central clearing.
Lower, with central clearing and regulation.
Sara Rehman
Feb 05, 2024

Settlement

At contract maturity, typically held to maturity.
Daily settlement, often closed out before expiry.
Sara Rehman
Feb 05, 2024

Usage

Mainly for hedging, no secondary market.
For hedging and speculation, active secondary market.
Sara Rehman
Feb 05, 2024
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Forward Contract and Futures Contract Definitions

Forward Contract

A forward contract is a private agreement to buy/sell an asset at a future date at a specific price.
The company entered a forward contract to purchase oil at a fixed price in six months.
Sara Rehman
Jan 24, 2024

Futures Contract

These contracts have an active secondary market for trading.
The investor sold his wheat futures contracts before maturity in the secondary market.
Sara Rehman
Jan 24, 2024

Forward Contract

Forward contracts are customizable financial instruments for trading various assets.
They used a forward contract to hedge against currency fluctuation risks.
Sara Rehman
Jan 24, 2024

Futures Contract

It involves daily settlement and is regulated by financial exchanges.
His futures contract positions were marked to market daily for price changes.
Sara Rehman
Jan 24, 2024

Forward Contract

Forward contracts are tailor-made to suit the specific needs of the contracting parties.
The exporter used a forward contract to lock in the exchange rate for an upcoming transaction.
Janet White
Jan 24, 2024

Futures Contract

Futures contracts are used for both hedging risks and speculative purposes.
The airline company used futures contracts to hedge against rising jet fuel prices.
Sara Rehman
Jan 24, 2024

Forward Contract

A forward contract is an over-the-counter agreement for future transactions.
The forward contract ensured the farmer a set price for his crop at harvest.
Huma Saeed
Jan 24, 2024

Futures Contract

Futures contracts have fixed terms and are used for commodities, currencies, and financial indexes.
The investor traded futures contracts on the stock index for speculative gains.
Sara Rehman
Jan 24, 2024

Forward Contract

It's a non-standardized contract typically settled at maturity.
The manufacturer signed a forward contract to secure raw materials at a predetermined price.
Janet White
Jan 24, 2024

Futures Contract

A futures contract is a standardized, exchange-traded agreement to buy/sell assets at a future date.
Traders bought futures contracts anticipating a rise in gold prices.
Sara Rehman
Jan 24, 2024

FAQs

Where are forward contracts traded?

They are traded over-the-counter, privately.
Sara Rehman
Feb 05, 2024

What is a forward contract?

A customizable agreement to buy/sell an asset at a future date at a specific price.
Sara Rehman
Feb 05, 2024

Who uses forward contracts?

They're used by businesses and individuals to hedge specific risks.
Harlon Moss
Feb 05, 2024

How is counterparty risk managed in futures contracts?

Through central clearinghouses and regulatory oversight.
Janet White
Feb 05, 2024

Are forward contracts standardized?

No, they are tailor-made and non-standardized.
Harlon Moss
Feb 05, 2024

Can futures contracts be used for speculation?

Yes, they are widely used for both hedging and speculative purposes.
Harlon Moss
Feb 05, 2024

What is the trading venue for futures contracts?

Futures contracts are traded on regulated exchanges.
Aimie Carlson
Feb 05, 2024

Do futures contracts have fixed terms?

Yes, they have standardized terms and conditions.
Aimie Carlson
Feb 05, 2024

How are futures contracts defined?

Standardized, exchange-traded agreements for future asset transactions.
Huma Saeed
Feb 05, 2024

Is there an active secondary market for futures contracts?

Yes, futures contracts are actively traded on secondary markets.
Harlon Moss
Feb 05, 2024

What is the counterparty risk in a forward contract?

Higher, as they lack centralized clearing and regulation.
Aimie Carlson
Feb 05, 2024

What about settlement in futures contracts?

There's daily settlement, with positions often closed before expiry.
Harlon Moss
Feb 05, 2024

Can forward contracts be customized?

Yes, they are highly customizable to suit specific needs.
Janet White
Feb 05, 2024

Can forward contracts be traded on a secondary market?

No, they generally lack a secondary market.
Sara Rehman
Feb 05, 2024

Are futures contracts flexible in terms?

No, they have fixed, standardized terms.
Janet White
Feb 05, 2024

What assets are typically involved in forward contracts?

Commodities, currencies, and financial instruments, among others.
Janet White
Feb 05, 2024

How is settlement handled in forward contracts?

Typically at contract maturity, and usually held to maturity.
Sara Rehman
Feb 05, 2024

How are forward contracts used in business?

Mainly for hedging against price fluctuations in assets.
Janet White
Feb 05, 2024

What are common assets in futures contracts?

Commodities, financial indexes, and currencies.
Janet White
Feb 05, 2024

What's the purpose of trading futures contracts?

For hedging risks and speculative trading in various markets.
Sara Rehman
Feb 05, 2024
About Author
Written by
Sara Rehman
Sara Rehman is a seasoned writer and editor with extensive experience at Difference Wiki. Holding a Master's degree in Information Technology, she combines her academic prowess with her passion for writing to deliver insightful and well-researched content.
Edited by
Huma Saeed
Huma is a renowned researcher acclaimed for her innovative work in Difference Wiki. Her dedication has led to key breakthroughs, establishing her prominence in academia. Her contributions continually inspire and guide her field.

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