| Trading Venue |
Over-the-counter (OTC) market, privately negotiated between parties. |
Traded on regulated exchanges, such as the Chicago Mercantile Exchange (CME). |
| Contract Customization |
Fully customizable: terms like quantity, price, and settlement date can be tailored. |
Standardized contracts with fixed terms regarding quantity, expiration, and settlement. |
| Counterparty Risk |
High counterparty risk due to the absence of a central clearinghouse. |
Lower counterparty risk, as exchanges use central clearinghouses to guarantee performance. |
| Settlement |
Typically settled at maturity, with the possibility of physical or cash settlement. |
Marked to market daily, with gains and losses settled daily; physical or cash settlement at maturity. |
| Margin Requirements |
No margin requirements, but collateral may be required depending on the parties' agreement. |
Requires initial and maintenance margins, determined by the exchange. |
| Liquidity |
Generally less liquid due to the OTC nature and customization of contracts. |
Highly liquid, with active trading on exchanges and standardized contracts. |
| Regulation |
Less regulated, with terms and enforcement relying on the agreement between parties. |
Heavily regulated by exchanges and regulatory bodies, ensuring transparency and compliance. |
| Pricing Transparency |
Prices are not publicly available, as forwards are privately negotiated. |
Prices are transparent and publicly available, quoted on exchanges. |
| Typical Users |
Corporations, financial institutions, and entities with specific hedging needs. |
Traders, speculators, hedgers, and arbitrageurs in both retail and institutional markets. |
| Contract Settlement Date |
The settlement date is flexible and mutually agreed upon by the parties. |
Standardized expiration dates set by the exchange (e.g., monthly, quarterly). |
| Purpose |
Primarily used for hedging specific risks in commodities, currencies, or interest rates. |
Used for hedging, speculation, and arbitrage across a wide range of markets. |
| Contract Size |
Variable and negotiated between the contracting parties. |
Fixed and standardized by the exchange. |
| Example |
A company and a bank agree on a forward contract to exchange $1 million in six months at a predetermined rate. |
A trader buys a futures contract to purchase 100 barrels of oil at $70 per barrel, expiring in three months. |
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