Futures and forward markets both look into the future as far as pricing of asset is concerned because the pricing of these assets depend on outcome of certain events which may be favorable or unfavorable for the stock or the commodity which in question. Given below are some of the differences between futures and forward markets –
- The price of futures is marked to market at the end of every trading day and therefore everyday profit or loss is credited or debited to the trading member account whereas the price of forward contracts is not marked to market and settlement happens at the end of the contract period.
- Futures contracts are traded on exchanges which are organized and also well regulated whereas forwards are private contracts and there they are not regulated which makes them risky because of the counter party risk.
- Futures contracts are standardized in terms of quantity, price and other such variables whereas Forwards are customized arrangements and therefore there is no standardization which results in different contracts being traded differently.
- In futures there is presence of clearing house which acts as counter party to both the parties and therefore eliminates the risk of non performance of contracts while in forwards contracts there is no clearinghouse and thus the counter party risk is higher.
- Future market is more popular and large of number of transactions happen in this market as compared to forward market.