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Future Forward characteristics

Future Forward characteristics

FUTURES:

A futures contract is an agreement between two parties that commits one party to buy an underlying financial instrument (bond, stock or currency) or commodity (gold, soybean or natural gas) and one party to sell a financial instrument or commodity at a specific price at a future date.

Characteristics of Futures:

1.Standardization of contract:

Futures are standardized contracts wherein the terms and conditions of the contract is highly standardized and are exchange traded.

2.Counterparty Risk:

In a futures contract, the exchange clearing house itself acts as the counterparty to both parties in the contract. To further reduce credit risk, all futures positions are marked-to-market daily, with margins required to be posted and maintained by all participants at all times. All this measures ensure zerocounterparty risk in a futures trade.

3.Existence of Secondary market:

The highly standardized nature of futures contracts makes it possible for them to be traded in a secondary market.

The existence of an active secondary market means that if at anytime a participant in a futures contract wishes to transfer his obligation to another party, he can do so by selling it to another willing party in the futures market.

Future Forward characteristics

FORWARDS:

A forward contract is an agreement between a buyer and a seller obligating the seller to deliver a specified asset of specified quality and quantity to the buyer on a specified date at a specified place and the buyer, in turn, is obligated to pay to the seller a pre-negotiated price in exchange of the delivery.

Future Forward characteristics

Characteristics of Forwards:

1.Standardization of contract:

Forwards are privately negotiated contracts which are entered according to the requirements of the entities entering into the contract. They are traded over the counter

2.Counterparty Risk:

Forward contracts, on the other hand, do not have such mechanisms in place. Since forwards are only settled at the time of delivery, the profit or loss on a forward contract is only realized at the time of settlement, so the credit exposure can keep increasing. Hence, a loss resulting from a default is much greater for participants in a forward contract.

3.Existence of Secondary market:

In contrast, there is essentially no secondary market for forward contracts.

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1 comments
  1. Anand Kumar Ray says:

    Truly it is an awesome app.
    It helps the students very much..

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