Futures and forwards are contracts that require deferred delivery of an underlying asset or cash settlement at a future date. A future is a standardized contract traded on an exchange, while a forward is a customized over-the-counter contract. Forwards are useful when futures do not exist for certain commodities/financials or when standard futures terms do not match needs. Forwards involve counterparty risk while futures involve clearinghouse guarantees.

4. Futures & Forwards Distinguished More costly Less costly Difficult to terminate Easy to terminate No marking to market Marked to market Not regulated Regulated Identity is relevant Identity of counterparties is irrelevant Are customized Are standardized Trade in OTC markets They trade on exchanges FORWARDS FUTURES