Some Major Differences Between The Futures And The Forward Contract
The futures contract was designed to take care of the flaws of the forward’s contract. Here are a few reasons why trading in the futures contract is a better option.
The futures contracts are standardized
The forward contract is not a standardized contract. The agreement could be for any weight of the commodity. However, in the futures contract, one gets to enter the contract as per parameters that are standard. These parameters are also not negotiable.
The futures contracts can be traded
It is easy to trade the futures contract. This means that unlike the forward’s contract, you do not have to keep the futures contract until the end of the agreement. This is also known as the expiry date of the contract. In case our views on the contract change at any time you can just sell off the contract to someone else.
The futures market is regulated
The futures market which comes under the financial derivative market is completely regulated. This means that there is a governing body over it which keeps track of all the transactions that happen in the futures market. This means that the contract is safe and the risk of default is not possible when you enter into a futures contract.
Futures contract have a time bound
The futures contracts are designed for different time frames. This is also known as the contract expiry. The time frame could be as small as a month or for three months. You can purchase the contract based on the time frame that you choose.
Settlement in cash
Most of the futures contract will get settled in cash. This means that the difference in cash is paid out. There is no physical movement of the asset involved in the futures contract. The settlement process is also very transparent because there is a governing body that is looking at all the transactions that are happening.
Spot price and the futures price
The spot price and the futures price is something that you need to understand before you start to trade the futures contract. The spot price is basically the price at which the asset is traded in the regular market. This is the spot market.
The asset that is traded in the spot market is the spot price and the one that is traded in the futures market is the futures price. The price of the commodity in the spot and the futures market move together. Thus when one goes up in value the other goes up too.