Concept of Forward and Futures Contracts

Both forward and futures contracts are agreements to buy or sell an underlying asset at a predetermined price on a specified future date. They are fundamental tools in financial markets, allowing participants to manage price risk or speculate on future price movements. However, they differ significantly in their structure, trading mechanisms, and regulation.

Forward Contract:

A forward contract is a private, customizable agreement between two parties. It obligates one party to buy and the other to sell a specific quantity of an underlying asset at a price agreed upon today (the forward price) for delivery on a specific future date (the settlement date). Think of it as a personalized contract tailored to the exact needs of the buyer and seller.

Futures Contract:

A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of a standardized underlying asset at a predetermined price (the futures price) on a specified future date (the settlement date or delivery month). It's like a mass-produced contract, with terms defined by the exchange where it's traded.