Topic :

Future markets Forward markets

Forward Contracts
A forward contract ,simply amounts to setting a price today for a trade that will occur in the future. A Forward Contract is a contract made today for delivery of an asset at a pre specified time in the future at a price agreed upon today. The buyer of a forward contract agrees to take delivery of an underlying asset at a future time, T, at a price agreed upon today

Example :
Wheat farmer planted crop expected yield 5000 bushels
Farmer sells bushels forward Miller also agreed to purchased

price 550 cents per bushel

Time : 5 months from now

$27,500

Futures Contracts
A futures contract differs from forward :

First, intermediate gains or losses are posted each day during

the life of the futures contract marking to market

Second, futures contracts are traded on organized exchanges with standardized terms whereas forward contracts are traded over-the-counter (customized one-off transactions

between a buyer and a seller).

Example :
Australian speculator buys one SPI future contract on the Sydney futures exchange (SFE) Opening : 11:00 am on June 6: future price 2300 Closing : June 6: future price2290

Gain or loss : marking to market

$25*Index $25*(2290-2300)=-250

Seller gain $250 and buyer loss $250

Difference between forward and future contracts

Forward contract
Private agreement between two parties Chances of default Settlement end of contract

Future contract
Exchange traded Clearing houses guarantees transaction Marked to market daily

Prespecified date
Not rigid in terms and conditions

Range of dates
Rigid in terms and conditions