Final answer:
Futures and forward markets differ in terms of counterparty credit risk, contract terms, delivery expectations, timing flexibility, regulation, liquidity requirements, and capital requirements.
Step-by-step explanation:
Counterparty credit risk: In futures markets, there is typically a lower counterparty credit risk as they are traded on organized exchanges where there is central clearing and guarantee of trades. In forward markets, counterparty credit risk is higher as there is no central clearinghouse and counterparties bear the risk of default.
Contract terms: Futures contracts have standardized contract terms, such as quantity, quality, and delivery date. Forward contracts, on the other hand, have customized terms agreed upon by the counterparties.
Delivery expected, timing flexibility: In futures markets, physical delivery is not always expected. Most futures contracts are closed out before the delivery date. In forward markets, physical delivery is expected and the timing flexibility is higher as parties can agree on the delivery date that suits them.
Regulation: Futures markets are regulated by regulatory bodies that oversee the trading and ensure fair practices. Forward markets do not have the same level of regulation.
Liquidity requirements: Futures markets are typically more liquid as they are traded on organized exchanges with many participants. Forward markets may have lower liquidity as they are usually traded over-the-counter between two parties.
Capital requirements: In futures markets, margin requirements are in place to ensure that parties have enough capital to cover potential losses. Forward markets do not have margin requirements but may require higher capital commitments due to the higher credit risk.