It is an Over-The-Counter derivative contract in which two parties agree that one party, the buyer, will purchase an underling asset from the other party, the seller, at a later date at a fixed price they agree on when the contract is signed.
It is an exchange traded standardized derivative contract in which two parties agree that one party, the buyer, will purchase an underlying asset from the other party, the seller, at a later date and at a price agreed on by the two parties when the contract is initiated and in which there is a daily settling of gain and losses and a credit guarantee by the futures exchange through its clearinghouse.
At the expiration date of the contract, if the market price is above the agreed price, then the buyer of the future contract will have incurred a profit and the seller will acquire the loss. The buyer will be able to take delivery of the underlying at a lower price and sell it at a higher market price locking the profit.
Conversely, if the price is lower than the agreed price, the trader’s counter party (the future seller) will make a profit.
Advantages of Forward over Futures
– Forward deals can be customized
– Forwards have wider range of underlying assets
– Available at most banks
Disadvantages of Forward over Futures:
– Counterparty risk