What Is the Key Difference between a Forward Contract and a Futures Contract?
The key difference between a forward and a futures contract lies in their standardization and trading venue. Futures contracts are standardized in terms of quantity, quality, and delivery date, and are traded on public exchanges.
This standardization makes them highly liquid. In contrast, forward contracts are private, customizable agreements between two parties and are traded over-the-counter (OTC).
This customization offers flexibility but also introduces higher counterparty risk and lower liquidity compared to futures.
Glossar
Forward Contract
Structure ⎊ A forward contract, within cryptocurrency and financial derivatives, establishes a customized agreement for the future exchange of an asset at a predetermined price and specified date.
Forward Contracts
Structure ⎊ Forward contracts, within cryptocurrency and financial derivatives, establish a customized agreement for the future exchange of an asset at a predetermined price and date, differing from standardized exchange-traded derivatives.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Futures Contracts
Mechanism ⎊ Futures contracts, within cryptocurrency and broader financial derivatives, represent standardized agreements obligating parties to transact an asset at a predetermined price on a specified future date; these instruments facilitate price discovery and risk transfer, extending beyond traditional commodities to encompass digital assets and complex financial indices.