Level 1 CFA® Exam:
Futures Contracts vs Forward Contracts
Both futures and forwards contracts call either for delivery or for cash settlement. Also, both forward and futures have a zero value at the start. This is one thing that distinguishes them from options, for which a premium needs to be paid.
| Forward Contracts | Futures Contracts |
|---|---|
| traded on a unregulated market | traded on an organized exchanges |
| tailor-made | standardized |
| no clearinghouse supervision results in exposure to the risk of default by the other party | clearinghouse supervision eliminates the risk of default by the other party |
| the date and method of settlement, as well as, the size of the contract are agreed on by the parties | the date and method of settlement, as well as, the size of the contract are standardized |
| security deposit depends on the parties | security deposit (aka. margin) is obligatory |
| settled at expiration | settled on daily basis (aka. marking-to-market) |
