Question

What are futures contracts and forward contracts? Describe two differences between them.

Answer 1

The forward price and the futures price of a commodity or financial instrument are prices agreed upon today for the delivery of a commodity or financial instrument at some time in the future. The forward price and the futures price of an asset need not to be equal. All gains and losses on the forward position are settled at the maturity date. Futures contracts are standardized to facilitate their liquidity and to allow them to be effectively traded on organized futures exchanges. Gains and losses on futures are marked-to-market daily.

Answer 2

Step-by-step explanation:

A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter. A futures contract has standardized terms and is traded on an exchange, where prices are settled on a daily basis until the end of the contract.