Futures and Forward Contract

Futures and forwards contract are the major example of derivative assets that would derive their value from underlying assets. Significantly, in this context, it is to be said that futures contract is the legal agreement for buying or selling specific commodity assets or security at the predetermined price at predefined price at the specific time in future. Therefore, it can be said that futures contracts are standardised for quality as well as quantity for facilitating the process of trading on futures exchange (Namany et al. 2020). The buyer of a futures contract will be taking on the obligation for buying as well as receiving the underlying assets when the future contracts would expire. The seller of the futures contract would therefore take the obligation for providing as well as delivering the assets underlying at the date of expiration. In this regard, it is further to be stated that a futures contract would be allowing the investor to speculate on direction of a security, commodity or financial instrument either using long or short leverage parameter (Hynes et al. 2020). Futures are also often used for hedging the movement of price of the underlying assets for helping to prevent any losses from unfavourable price changes.

On the other hand, forwards contract would refer to the customised contract between two parties for buying or selling an asset at specific price on future date. A forward contract could be used for either hedging or speculation although its non-standardised nature would make it specifically apt for the purpose of hedging. Forward contract is the customisable derivatives contract between two parties that can further be tailored to specific price on the date in future. Forwards contract would not be traded on the centralised exchange and would further be considered over the counter or OTC instruments (Prager et al. 2020). For example; forwards contract could further be helpful for producers and users of agricultural products hedge against a change in underlying assets’ or commodity prices. It is further to be considered in this significance that financial institutions that would initiate forward contracts would be exposed to greater settlement degree and default risks in comparison with contracts that are being marked-to-market on regular basis. Therefore, in this accordance, the major difference between forwards contract and futures contract is that forwards contract is the private as well as customisable agreement that would settle at the end of agreement and would further be traded OTC. On the other hand, futures contracts are observed to be having standardised terms. (Bodislav et al. 2020)

Relevance of Forwards and Futures Markets for USA Market

Furthermore, followed to the discussion above, the relevance of forwards and futures markets could be seen for the USA market. For USA market, futures contracts would protect against price fluctuations. Furthermore, forwards contracts in USA market are observed to be used as the tool for hedging in the industry that is having higher level of price fluctuations. This is because; futures are regulated, they would be coming with less counterparty risks compared to forwards market in USA (Hassan and Mano, 2019). In the USA trading market, commodity brokers are observed to be using futures and forwards contracts primarily to lower the fluctuations price risks through locking in the price beforehand. Therefore, market participants would have the scope or opportunity to hedge the risks. In addition to this, it is further to be considered that while futures would be highly liquid, forwards would be typically lower on the market liquidity aspects. In this context, the relevance of forwards contract and futures contract could be seen in the USA market.

Reference List

Bodislav, D.A., Buzoianu, O.A.C., Burlacu, S. and Rădulescu, C.V., 2020. Analysis of companies in Romania from the perspective of risk perception and the management needs thereof. Economic Convergence in European Union, 341.

Hassan, T.A. and Mano, R.C., 2019. Forward and spot exchange rates in a multi-currency world. The Quarterly Journal of Economics, 134(1), pp.397-450.

Hynes, W., Trump, B., Love, P. and Linkov, I., 2020. Bouncing forward: a resilience approach to dealing with COVID-19 and future systemic shocks. Environment Systems and Decisions, 40, pp.174-184.

Namany, S., Govindan, R., Alfagih, L., McKay, G. and Al-Ansari, T., 2020. Sustainable food security decision-making: an agent-based modelling approach. Journal of Cleaner Production, 255, p.120296.

Prager, D., Burns, C., Tulman, S. and MacDonald, J., 2020. Farm use of futures, options, and marketing contracts (No. 1473-2020-854).

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