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31 August 2012
www.ramakrishnavadlamudi.blogspot.com
In financial markets across the globe, trillions of dollars of derivative transactions take place on a daily basis round the clock right from New York, Chicago, London, Shanghai, Bombay, Hong Kong, to Singapore. Forwards and futures are important building blocks of derivative transactions. The following easy-to-understand table describes the important differences between forward and futures contracts. And later, the article briefly explains their general uses, types and salient features.
Forwards
1 They are customized products to suit individual needs - they serve specialized clientele In general, there is no mark-tomarket of contracts
Futures
They are standardized products dealt on stock exchanges
Mark-to-market is done on a daily basis providing interim cash flows A small margin needs to be paid at the start of a transaction The contract size is fixed and uniform The stock exchange bears the counterparty risk (no credit risk) They are multiparty contracts, involving many parties They are well regulated
No cash changes at the start of a transaction The contract size depends on the needs of clients Counterparty risk exists in forwards (credit risk exists) They are bilateral contracts, that is, between two parties They are lightly regulated
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