What is a forward and futures contract?

Forward and futures contracts involve the agreement between two parties to buy and sell an asset at a specified price by a certain date. A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter (OTC).

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.

What is the difference between a futures contract and a standardized contract?

Futures contracts, on the other hand, are standardized contracts that trade on stock exchanges. As such, they are settled on a daily basis. These arrangements come with fixed maturity dates and uniform terms. There is very little risk with futures, as they guarantee payment on the agreed-upon date.

What is a futures contract example?

Futures Contract Example Suppose that Ben’s coffee shop currently purchases coffee beans at a price of $4/lb. At this price, Ben’s is able to maintain healthy margins on the sale of coffee beverages. However, Ben reads in the newspaper that cyclone season is coming up and this may threaten to destroy coffee plantations.