What are futures and forwards?

Future and forward contracts (more commonly referred to as futures and forwards) are contracts that are used by businesses and investors to hedgeagainst risks or speculate. Futures and forwards are examples of derivative assets that derive their values from underlying assets.

Are forward contracts more risky than futures?

There is more counterparty risk associated with forwards as opposed to futures, which are less risky as there is almost no chance for default. The forward contract is a privately negotiated agreement between a buyer and a seller to trade an asset at a future date at a specified price.

What is futures trading & how does it work?

Futures contracts are usually traded publicly on futures exchanges. As it is a standardized contract, futures can be traded through brokers. The futures trading process has lots in common with standard stock trading, as in both cases, the involved counterparties operate the futures trade with the help of their brokerage firms.

What is a forward contract and how does it work?

The private nature of forward contracts also creates a different level of obligation for the buyer and seller. Specifically, they each have to follow through on their end of the bargain. So if a buyer agrees to purchase five tons of coffee beans on a certain date, they’re required to do so.