What are the Differences Between Future and Forward Transactions?
Future and forward transactions are derivative products widely used in financial markets. Derivatives are contracts that gain or lose value based on the price of another asset. Future and forward transactions are contracts to buy or sell a certain asset at a certain price on a certain date. These contracts can be used to hedge against market price fluctuations, generate speculative profits, or take advantage of arbitrage opportunities.
The main differences between futures and forward transactions are:
- Futures transactions are standardized contracts on organized exchanges. Forward transactions are contracts specifically arranged in over-the-counter markets.
- Future transactions are evaluated daily with the mark to market system and profit or loss is reflected in the accounts. Forward transactions are evaluated at once at the end of maturity and profit or loss is reflected in the accounts.
- Future transactions are guaranteed by the exchange clearing center and have no counterparty risk. Forward transactions are made directly between the parties and there is counterparty risk.
- Futures are liquid markets and contracts can be bought and sold at any time. Forward transactions are illiquid markets and contracts are generally held until maturity.
- Future transactions provide tax advantages and ease of accounting. Forward transactions do not provide tax advantages and create accounting complexity.
These differences between futures and forward transactions help investors determine their preferences based on their needs, expectations and risk tolerance. Both derivative products play an important role in financial markets and offer various benefits to investors.