Types of Forward and Futures Contracts

While the underlying assets can vary widely, here are some common categories:

Forward Contracts:

1. Currency Forwards: Used to hedge against exchange rate fluctuations.
   • Example: A U.S. company expecting a payment in Euros in six months can enter into a forward contract to buy Euros at a predetermined exchange rate, locking in the dollar cost of the payment.
2. Interest Rate Forwards (Forward Rate Agreements - FRAs): Used to manage interest rate risk.
   • Example: A company planning to borrow money in the future can use an FRA to lock in an interest rate today.
3. Commodity Forwards: Used to hedge against price changes in commodities like agricultural products, energy, or metals.
   • Example: An airline might use a forward contract to lock in the price of jet fuel.

Futures Contracts:

1. Equity Index Futures: Based on stock market indices like the S&P 500 or Dow Jones.
   • Example: An investor can buy S&P 500 futures to gain exposure to the overall U.S. stock market.
2. Interest Rate Futures: Based on debt instruments like Treasury bonds or Eurodollar deposits.
   • Example: A bond portfolio manager can use Treasury bond futures to hedge against interest rate increases.
3. Currency Futures: Similar to currency forwards but standardized and exchange-traded.
   • Example: A speculator who believes the Japanese Yen will appreciate against the U.S. dollar can buy Yen futures.
4. Commodity Futures: Traded on a wide range of commodities, including agricultural products (wheat, corn, soybeans), energy (crude oil, natural gas), and metals (gold, silver, copper).
   • Example: A farmer can sell wheat futures to lock in a price for their harvest.