What factors should you consider when choosing between a forward contract and a future contract?

Usually, the most significant difference between forwards and futures is whether a formal exchange is involved. For forwards, the buyer and seller interact directly and handle the transaction privately. With futures, there’s an exchange, like the Chicago Mercantile Exchange, involved.

What is the difference between a forward contract and a future contract?

Both forward and futures contracts involve the agreement to buy or sell a commodity at a set price in the future. But there are slight differences between the two. While a forward contract does not trade on an exchange, a futures contract does.

Which is better for hedging, a forward contract or a futures contract?

The credit risk in a forward contract is relatively higher that in a futures contract. Forward contracts can be used for both hedging and speculation, but as the contract is tailor made, it is best for hedging. Conversely, futures contracts are appropriate for speculation.

What are the pros and cons of futures vs forwards?

For forwards, the buyer and seller interact directly and handle the transaction privately. With futures, there’s an exchange, like the Chicago Mercantile Exchange, involved. As a result, futures are more standardized, while forwards are more customizable.