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What are futures contracts & forward contracts?

Futures contracts and forward contracts are agreements to buy or sell an asset at a specific price at a specified date in the future. These agreements allow buyers and sellers to lock in prices for physical transactions occurring at a specific future date to mitigate the risk of price movement for the given asset through the date of delivery.

Can a forward contract be used for hedging?

A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging . A forward contract is a customizable derivative contract between two parties to buy or sell an asset at a specified price on a future date.

What is the difference between a forward and a future?

Since forwards are privately negotiated, they provide the guarantee to settle the contract. Futures, on the other hand, have an institutional guarantee provided by the clearinghouses that back them. Unlike forwards, where there is no guarantee until the contract settles, futures require a deposit or margin.

Why are details of futures contracts made public?

Details of futures contracts are made public because they are traded on exchanges, unlike forwards, which are negotiated privately between counterparties. Because futures are regulated, they come with less counterparty risk than forward contracts.

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