Finc derivatives - futures and forwards

Q: What is a forward contract?

A: OTC agreement to buy/sell an asset at a future date for a set price; non-standard and customizable.

Q: What details are included in a forward contract?

A: Underlying asset, size, maturity date, delivery arrangements.

Q: What is a futures contract?

A: Exchange-traded forward contract; standardized in asset grade, size, delivery location, price quotes, price limits, and position limits.

Q: How do you close out a futures position?

A: Take an opposite trade; actual delivery is usually avoided.

Q: Where are forwards traded?

A: Private contract, OTC.

Q: Where are futures traded?

A: Exchange-traded, organized market.

Q: How do contract terms differ?

A: Forwards = non-standard; Futures = standardized.

Q: When is profit/loss realized for forwards?

A: At contract maturity.

Q: When is profit/loss realized for futures?

A: Daily, via marking to market.

Q: How does delivery differ?

A: Forwards = delivery or final cash settlement usually occurs; Futures = usually closed out before maturity.

Q: How does credit risk differ?

A: Forwards = some credit risk; Futures = almost none due to margin accounts and clearing house.

Q: Why are forward and futures prices typically very similar in practice?

A: Differences are small because interest rate risk and settlement timing have limited effect; often treated as identical.