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Difference Between Futures and Forwards

futures_forwards_bookFutures vs Forwards

Futures and forwards contracts are used to make the process of hedge investments more simple. These contracts are used to trade securities, currencies and commodities, where the contracts are set to be settled at a future date. Since both of these processes are involved in the trading of contracts, and are not the real tools, people often to refer them as derivative trading methods. The trading world is complicated, and offers many challenges, therefore, it is wise to invest some time in learning about its rules and parameters, and ensure that you know exactly what you will be investing, and the associated processes involved. Although both futures and forwards contracts have similar features, there are certain differences between the two processes.

The futures contract is a financial contract, whereby two parties make an agreement for a future transaction. In a futures contract, the buyer will buy a certain commodity at a price, and on the basis of a future date, which is specifically stated within the agreement. However, most futures contracts do not end with the transfer of the physical commodity. In order to hedge an investment process, a futures contract is used like most other derivatives. In the cash markets, the accounts are settled on a daily basis. The chances for profits are significantly unlimited, although, so are the chances of loss.

Futures contracts are common for the FOREX trading market. Companies and business organizations use the currency futures to hedge against the changes in the value of the various currencies. For example, a futures contract could be bought for the Japanese Yen. In this scenario, the business/individual will seek a guarantee for selling the Yen at specific USD values. It now does not matter whether the value of the Yen rises or falls, there is a guarantee that the Yen value will not decrease, and it will close according to the contract amount.

The forwards contract is rather quite similar. There is still an agreement with later date, where the company/individual will buy at a specific price. The key difference between the contracts, is that a forwards contract cannot be traded on the basis of an exchange. This means that cash amounts are not settled for accounts on a daily basis

In order to achieve success in futures or forwards contracts, you will need to study the risks involved, and perhaps acquire the assistance of a commodity broker. Futures and forwards contracts may not be considered a viable option for beginners.

Summary:

1.Futures contracts are common in FOREX.

2.A forwards contract cannot be traded on the basis of an exchange, whereas, this is possible in a futures contract.

3.Cash amounts are settled with trading accounts on a daily basis for futures contracts, whereas, this is not the case with forwards contracts.

4.Both contracts are used to simplify the process of hedging investments.


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