DISTINCTIONS BETWEEN FUTURES & FORWARDS

Forwards
No fixed location -Traded in dispersed interbank market 24 hrs a day. Lacks price transparency OTC market Contract with a bank Transactions are customized and flexible to meet customers preferences. Do not have price limits no unique method of valuation Counter party risk is variable

Futures
Traded only in centralized exchanges during specified trading hours. Exhibits price transparency. Clearing house Transactions are highly standardized to promote trading and liquidity. Have daily price limits marked to market every day Being one of the two parties, the clearing house standardizes the counterparty risk of all contracts.

Guarantee deposit Quotation by a bank Quoted rate spread between buying and selling rates Have no fixed maturity dates No cash flows take place until the final maturity of the contract. More than 90% of forward contracts are settled by actual delivery. Generally prices are quoted in European terms (units of local currency per USD); No daily variation margins Self regulated Settlement on terms of the contract Direct Transaction costs are low; indirect costs high in the form of high bid-ask spread

No guarantee deposit Quotation on market Commission or brokerage Have fixed maturity dates (only 4) On a daily basis, cash may flow in or out of the margin account, which is marked to market. Less than 1% are settled by delivery. Quoted in American terms ($s per unit of local currency) Daily variation margins Regulated by exchanges Settlement through clearing house Direct costs such as commission, clearing charges, exchange fees are high; indirect costs, bid-ask spreads are low.