Essentially, forward and futures contracts are agreements that allow traders, investors, and commodity producers to speculate on the future price of an asset. These contracts function as a two-party commitment that enables the trading of an instrument on a future date (expiration date), at a price agreed upon at the moment the contract is created.
The underlying financial instrument of a forward or futures contract can be any asset, such as equity, a commodity, a currency, an interest payment or even a bond.
However, unlike forward contracts, the futures contracts are standardized from a contract perspective (as legal agreements) and are traded on specific venues (futures contracts exchanges). Therefore, futures contracts are subject to a particular set of rules, which may include, for instance, the size of the contracts and the daily interest rates. In many cases, the execution of futures contracts is guaranteed by a clearing house, making it possible for parties to trade with reduced counterparty risks.
July 09, 2021 at 08:45AM
Open in Evernote