Differences between forward contract and futures contract?
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Answer Posted / akanksha saini
A futures contract, unlike the privately-traded forward
contract, is publicly traded. As with the forward, each
futures contract is for the purchase or sale of a loan,
currency or commodity with actual delivery scheduled to
occur at some time in the future. While the concept behind
both forwards and futures contracts is the same -- namely,
providing a way for buyers and sellers to lock in a price
today for transactions that will take place in the future --
the way in which they are implemented is, for the most part,
completely opposite.
While forward contracts are privately executed between two
parties who know each other (at least figuratively
speaking), futures contracts trade on the floor of a futures
exchange. And because they trade on the floor of an
exchange, the transactions are always handled by brokers who
are members of that exchange. No futures contracts are
executed by the parties themselves, thereby maintaining
anonymity throughout the process. For example when someone
buys pork bellies or U.S. T-bills via a futures contract,
they have no idea whom they are actually buying them from,
which brings up the subject of risk.
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