Difference between Forwards & Futures Contracts

    Basis of Difference Futures Forwards
    1. Trading Trading in a competitive arena (recognized exchange). Traded by telephones or telex (OTC)
    2. Size of Contracts Standardized in each futures market. Decided between buyer and seller.
    3. Price of Contract Changes every day. Remains fixed till maturity.
    4. Mark to Market Marked to market every day. Not done.
    5. Margin Margins are to be paid by both buyers and sellers. No margin required.
    6. Counter Party Risk Not present. Present.
    7. Number of Contracts in a year The number of contracts in a year is fixed. There can be any number of contracts.
    8. Frequency of Delivery Very few futures contracts are settled by actual delivery. 90% of all forward contracts are settled by actual delivery.
    9. Hedging Hedging is by nearest month and quantity contracts. So, it is not perfect. There are tailor-made for specific dates and quantities. So, it is perfect.
    10. Liquidity Highly liquid. No liquidity.
    11. Nature of Market Exchange-traded. Over the Counter.
    12. Mode of Delivery Standardized. Most of the contracts are cash-settled. Specifically decided. Most of the contracts result in delivery.
    13. Transaction Costs Include brokerage fees for buy and sell orders. Costs are based on the bid-ask spread.
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