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    Forward Vs Future Contracts

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    Chau Nguyen Uyen Thu
    Forward contracts are private agreements between two parties that involve delivery of an asset at a specified future date at an agreed upon price. Futures contracts are traded on exchanges, involve standardized contracts with multiple delivery dates, and are settled daily as the contract price fluctuates. While both can result in profits of $100,000 for long positions if the exchange rate rises, futures contracts offer virtually no credit risk since they are traded on an exchange and positions are marked to market daily.

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    Forward Vs Future Contracts

    Uploaded by

    Chau Nguyen Uyen Thu
    136 views10 pages
    Forward contracts are private agreements between two parties that involve delivery of an asset at a specified future date at an agreed upon price. Futures contracts are traded on exchanges, involve standardized contracts with multiple delivery dates, and are settled daily as the contract price fluctuates. While both can result in profits of $100,000 for long positions if the exchange rate rises, futures contracts offer virtually no credit risk since they are traded on an exchange and positions are marked to market daily.

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    Forward vs Future Contracts

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    Forward contracts are private agreements between two parties that involve delivery of an asset at a specified future date at an agreed upon price. Futures contracts are traded on exchanges, involve standardized contracts with multiple delivery dates, and are settled daily as the contract price fluctuates. While both can result in profits of $100,000 for long positions if the exchange rate rises, futures contracts offer virtually no credit risk since they are traded on an exchange and positions are marked to market daily.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    136 views10 pages

    Forward Vs Future Contracts

    Uploaded by

    Chau Nguyen Uyen Thu
    Forward contracts are private agreements between two parties that involve delivery of an asset at a specified future date at an agreed upon price. Futures contracts are traded on exchanges, involve standardized contracts with multiple delivery dates, and are settled daily as the contract price fluctuates. While both can result in profits of $100,000 for long positions if the exchange rate rises, futures contracts offer virtually no credit risk since they are traded on an exchange and positions are marked to market daily.

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    The key takeaways are that forward contracts are private agreements between two parties that are not standardized and usually involve physical delivery of an asset, while futures contracts are traded on an exchange, are standardized, involve daily settlement and usually do not result in physical delivery of the underlying asset.

    Forward contracts are private agreements between two parties that are not standardized and usually involve physical delivery of an asset at a specified future date, while futures contracts are traded on an exchange, are standardized, involve daily settlement and usually do not result in physical delivery of the underlying asset.

    Profits from long forward and futures positions are calculated as the difference between the contract price and settlement price multiplied by the notional amount. For futures, gains are realized daily over the contract period, while for forwards gains are realized entirely on the settlement date.

    FORWARD vs FUTURE CONTRACTS

    - F49802136

    4
    Not settle daily

    3
    Delivery of the physical asset or to final settlement in cash

    2
    Traded in the over-the-counter market

    1
    Agreements to buy or sell an asset at a certain time in the A future for a certain price

    Agreements to buy or sell an asset at a certain time in the future for a certain price

    Future Contract

    Traded on a exchange

    Range of possible delivery dates

    Settle daily, contract is usually closed out prior to maturity.

    FORWARD vs FUTURE CONTRACTS

    Private contract between two parties Not standardized Usually one specified delivery date Settled at end of contract Delivery or final cash settlement usually take place Some credit risk

    FORWARD

    FUTURE

    Traded on an exchange Standardized contract Range of delivery dates Settled daily Contract is usually closed out prior to maturity Virtually no credit risk

    Profits from Forward and Futures Contracts


    Investor A takes a long position in a 90-day forward contract on 1 million. The forward price is 1.6000 dollars per pound. Investor B takes a long position in 90-day futures contracts on 1 million. The futures price is also 1.6000 dollars per pound. At the end of the 90 days, the exchange rate proves to be 1.7000. The result of this is that investors A and B each make a total gain equal to (1.7000 1.6000) X 1,000,000 = $100,000 Investor A's gain is made entirely on the 90th day. Investor B's gain is realized day by day over the 90-day period. On some days investor B may realize a loss, whereas on other days he or she will realize a gain.

    Profits from Forward and Futures Contracts

    The short futures position is an


    unlimited profit, unlimited risk position that can be entered by the futures speculator to profit from a fall in the price of the underlying. The short futures position is also used by a producer to lock in a price of a commodity that he is going to sell in the future.
    -200000

    Profit
    Exchange Rate
    16000

    Short forward or future position

    Profits from Forward and Futures Contracts


    The long futures position is an

    Profit
    Exchange Rate
    16000

    unlimited profit, unlimited risk position that can be entered by the futures speculator to profit from a rise in the price of the underlying. The long futures position is also

    -200000

    used when a manufacturer wishes

    to lock in the price of a raw material


    that he will require sometime in the
    Long forward position

    future

    FOREIGN EXCHANGE QUOTES

    Futures exchange rates are quoted as the number Forward exchange rates are quoted of USD per unit of the foreign currency
    in the same way as spot exchange rates. This means that GBP, EUR, AUD, and NZD are USD per unit of foreign currency. Other currencies (e.g., CAD and JPY) are quoted as units of the foreign currency per USD.

    SUMMARY FOR CHAPTER 2


    A very high proportion of the futures contracts that are traded do not lead to the delivery of the underlying asset. However, it is the possibility of final delivery that drives the determination of the futures price The specification of contracts is an important activity for a futures exchange. The two sides to any contract must know what can be delivered, where delivery can take place, and when delivery can take place

    Margins are an important aspect of futures markets. An investor keeps a margin account with his or her broker. The account is adjusted daily to reject gains or losses

    Information on futures prices is collected in a systematic way

    Forward contracts differ from futures contracts in a number of ways. Forward contracts are private arrangements between two parties, whereas futures contracts are traded on exchanges.

    at exchanges and
    relayed within a matter of seconds to investors

    throughout the world

    SUMMARY FOR CHAPTER 2

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