The differences between Forward and Futures contracts are given below:
Difference # Forward Contracts:
1. The contract price is not publicly disclosed and hence not transparent.
2. The contract is exposed to default risk by counterparty.
3. Each contract is unique in terms of size, expiration date and asset type/quality.
4. The contract is exposed to the problem of liquidity.
5. Settlement of the contract is done by delivery of the asset on the expiration date.
6. Forward contracts are traded on personal basis or on telephone or otherwise.
7. Forward contracts are individually tailored and have no standardized size.
8. Forward contracts are traded in an over the counter market.
9. Forward contracts settlement takes place on the date agreed upon between the parties.
Difference # Future Contracts:
1. The contract price is transparent.
2. The contract has effective safeguards against defaults in the form of clearing corporation guarantees for trades and daily mark to market adjustments to the accounts of trading members based on daily price change.
3. The contracts are standardised in terms of size, expiration date and all other features.
4. There is no liquidity problem in the contract.
5. Settlement of the contract is done on cash basis.
6. Futures contracts are traded in a competitive arena.
7. Futures contracts are standardized in terms of quantity or amount as the case may be.
8. Future contracts are traded on organized exchanges with a designated physical location.
9. Futures contracts settlements are made daily via exchange’s clearing house.