Difference between futures and forward.

In commercial relations, the use of financial instruments such as futures and forward is common. What are the features of each of them?

What is a forward?

Under forward is meant a contract between traders, the subject of which is a transaction on an asset in the future in accordance with the price (place of purchase and sale, exchange rate) determined at the time of the agreement. This contract, as a rule, assumes the actual delivery of the goods - and not its virtual trading equivalent.

Thus, a forward is a financial instrument, typical mainly for over-the-counter trading. In general, a forward signed by the parties cannot be canceled - the agreed terms of the transaction are binding on the partners.

What is futures?

Under futures is also understood as a financial instrument that allows traders to agree on a transaction in the future on the terms that are determined at the time of signing the relevant contract.

But futures are primarily an exchange-traded instrument. It often does not imply actual delivery of the goods. By its legal nature, it is considered as a kind of forward, but it has a number of distinctive features. Namely:

  1. in futures contracts, as a rule, only prices and delivery times are fixed;
  2. Futures contracts are almost always accompanied by specifications that reflect additional terms of delivery.

Comparison

The main difference between a futures and a forward lies in the level of standardization of the corresponding contracts. Since futures are predominantly an exchange-traded instrument, the rules for concluding such agreements are regulated by an intermediary between the seller of a product or asset and its buyer. Forward is a less standardized instrument. The terms of his imprisonment are often determined by the parties without intermediaries.

As a rule, only the value and terms of the sold assets are fixed in futures transactions. Other terms of the agreement are fixed in the specifications accompanying the main futures contract. The terms of the forward transaction can be reflected in one agreement - without any specification.

Having determined what is the difference between a futures and a forward, we reflect the conclusions in a small table.

Table

Futures Forward
What do they have in common?
Futures is a subspecies of forward, both financial instruments are used in order to agree on certain conditions of a future transaction by partners some time before it
What is the difference between them? ​​
It is mainly an exchange instrumentOften used as an OTC instrument - when dealing with real assets
As a rule, more standardizedUsually less standardized
The price and term of the supplied asset is directly specified in the contract, the rest is in the specificationDirectly in the contract can specify any terms of delivery of goods, specified by traders
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