Here are the nine differences between Forward Contract and Futures Contract in the FOREX market:
|
|
Forward
Contract |
Futures
Contract |
|
1 |
Customized
agreement between two parties |
Standardized
contract traded on an exchange |
|
2 |
Negotiated terms
include specific currencies, amounts and maturity dates |
Terms are
predetermined and uniform for all contracts |
|
3 |
Traded over the
counter (OTC) between two parties |
Traded on a
centralized exchange with multiple participants. |
|
4 |
Not as liquid as
futures contracts |
Highly liquid with
active trading and price transparency |
|
5 |
Settlement occurs
at the end of the contract period |
Daily settlement
through gains or losses is common |
|
6 |
Parties bear
counterparty risk (credit risk) of default |
Minimal
counterparty risk due to exchange acting as the counterparty for all
transactions. |
|
7 |
Can be customized to
suit specific hedging needs. |
Standardized terms
may not perfectly align with individual hedging requirements. |
|
8 |
May require a
deposit or margin to secure the contract |
Requires daily
margin payments to maintain the position |
|
9 |
Commonly used by
corporations for hedging purposes |
Attracts a wide
range of participants, including speculators and arbitrageurs. |
These
differences highlight the contrasting features and applications of forward
contracts and futures contracts in the FOREX market. Forward contracts offer customization
and flexibility but involve counterparty risk, while futures contracts provide standardized
terms, higher liquidity and lower counterparty risk.