Comparison between Forwards and Futures Contracts¶

Aspect	Forwards Contracts	Futures Contracts
Trading Venue	Over-the-counter (OTC) market, privately negotiated between parties.	Traded on regulated exchanges, such as the Chicago Mercantile Exchange (CME).
Contract Customization	Fully customizable: terms like quantity, price, and settlement date can be tailored.	Standardized contracts with fixed terms regarding quantity, expiration, and settlement.
Counterparty Risk	High counterparty risk due to the absence of a central clearinghouse.	Lower counterparty risk, as exchanges use central clearinghouses to guarantee performance.
Settlement	Typically settled at maturity, with the possibility of physical or cash settlement.	Marked to market daily, with gains and losses settled daily; physical or cash settlement at maturity.
Margin Requirements	No margin requirements, but collateral may be required depending on the parties' agreement.	Requires initial and maintenance margins, determined by the exchange.
Liquidity	Generally less liquid due to the OTC nature and customization of contracts.	Highly liquid, with active trading on exchanges and standardized contracts.
Regulation	Less regulated, with terms and enforcement relying on the agreement between parties.	Heavily regulated by exchanges and regulatory bodies, ensuring transparency and compliance.
Pricing Transparency	Prices are not publicly available, as forwards are privately negotiated.	Prices are transparent and publicly available, quoted on exchanges.
Typical Users	Corporations, financial institutions, and entities with specific hedging needs.	Traders, speculators, hedgers, and arbitrageurs in both retail and institutional markets.
Contract Settlement Date	The settlement date is flexible and mutually agreed upon by the parties.	Standardized expiration dates set by the exchange (e.g., monthly, quarterly).
Purpose	Primarily used for hedging specific risks in commodities, currencies, or interest rates.	Used for hedging, speculation, and arbitrage across a wide range of markets.
Contract Size	Variable and negotiated between the contracting parties.	Fixed and standardized by the exchange.
Example	A company and a bank agree on a forward contract to exchange $1 million in six months at a predetermined rate.	A trader buys a futures contract to purchase 100 barrels of oil at $70 per barrel, expiring in three months.

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