Security Market Operations

Difference Between Forward and Future

Difference Between Forward and Future

Basis of DifferenceForwardFutures
Standardised AgreementForward Contracts are tailor made agreements wherein terms and conditions are determined by the parties involved in it .Futures contracts are standardised agreement wherein terms and conditions of the contract are decided by the regulating authority and every party entering into a contract follow the same rules and regulations .
IntermediaryIn case of forward contract , buyer and seller involved in the agreement directly negotiate with each other .In case of futures contract , buyer and seller do not know each other and negotiate through an intermediary known as “ Stock Exchange ” .
Risk of DefaultDue to the absence of an intermediary between buyers / sellers , there is a very high probability of default by any or all the parties involved in the agreement .Futures contracts are settled through clearing houses that guarantee the successful implementation of the transactions .
Advance PaymentForward contract does not force parties to make advance payment though it should not be a part of terms and conditions of an agreement .Parties entering in the futures contracts are obliged to deposit pre decided amount ( margin money ) with the regulating authority at the time of entering into a contract .
Market TypeForward Contracts are the part of Over the Counter Market .Futures Contracts are the part of Centralized Stock Exchange ( s ) such as NSE , BSE .
Settlement MechanismCash flow takes place only once i . e . at time of expiration of the contract .Margin Account ( i . e . advance payment ) is settled on daily basis .
Physical DeliveryForward Contracts are settled by Physical Delivery of an underlying asset.Futures contracts are usually settled by cash .

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