FORWARD CONTRACTS v/s FUTURES CONTRACTS :
1. A Forward Contract can be defined as a
contract between a bank and its
customer in which the bank agrees to
buy / sell a specific amount of foreign
currency on a fixed forward date or
within a fixed forward period, at a rate
decided on the date of the contract.
A Futures Contract can be defined as a
contract between an exchange and an
operator in in which the operator agrees
to buy / sell standardized amount of
foreign currency for delivery on a
standard maturity date in the future, at a
specified rate.
2. Forward Contracts are customized in
terms of amount and settlement date.
Futures Contracts are standardized in
terms of amount and settlement date.
3. Settlement date of a Forward Contract
can be any forward date.
All Futures Contracts maturing in a
particular calendar month are settled on
the last working day of the month in
India.
4. A Forward Contract can provide 100%
hedge to the customer.
Futures Contracts do not provide 100%
hedge to the operator.
5. A Forward Contract is a rigid
transaction whose terms cannot be
changed except with the original
counterparty.
A Futures Contract is a flexible
instrument which can be cancelled
through an opposite transaction with the
exchange.
6. Both parties to a forward contract carry
credit risk.
Futures Contracts do not involve credit
risks because for both buyers and
sellers, the counter-party is the
exchange which guarantees the
transaction. This is called the ‘Principle
of Novation’.
7. A Forward Contract normally does not
involve payment of any margin money
deposit. Therefore there is no cost of
funds.
Futures Contract involves maintenance
of initial and minimum margins with the
exchange. All Futures Contracts are
marked-to-market on a daily basis by
corresponding debit or credit to the
margin money account. If balance of
this account falls below the minimum
margin level, then the operator is called
upon to restore the margin money
account upto the initial margin level.
8. Crystallization of profit or loss takes
place on maturity date in forward contract.
Addition to the margin money account is
allowed to be withdrawn and it is
therefore possible to draw the profit
element before maturity date in future contract.
9. There are no intermediaries in forward
contracts.
Futures Contracts with the exchange
are possible only through recognized
brokers.
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