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Vaselesa [24]
4 years ago
7

Futures contracts differ from forwarding contracts in all of the following ways except:

Social Studies
1 answer:
I am Lyosha [343]4 years ago
5 0

Answer:

a. Delivery is made most often in forwarding contracts.

Explanation:

As in both the two types of contract the delivery of the asset takes place at a predetermined time in future, these are commonly misconstrued by the people. But if you dig a bit deeper, you will find that these two contracts differ in many grounds.

A forward contract is a contract whose terms are tailor-made i.e. negotiated between buyer and seller. It is a contract in which two parties trade in the underlying asset at an agreed price at a certain time in future. It is not exactly same as a futures contract, which is a standardized form of the forward contract. A futures contract is an agreement between parties to buy or sell the underlying financial asset at a specified rate and time in future.

While a futures contract is traded in an exchange, the forward contract is traded in OTC, i.e. over the counter between two financial institutions or between a financial institution or client.

Comparison:

Meaning: Forward Contract is an agreement between parties to buy and sell the underlying asset at a specified date and agreed rate in future.

A contract in which the parties agree to exchange the asset for cash at a fixed price and at a future specified date, is known as future contract.

                        Forward Contract                   Futures Contract

What is it? It is a tailor made contract. It is a standardized contract.

Traded on Over the counter, i.e.                Organized stock exchange.

                    there is no secondary market.        

                           

Settlement       On maturity date.                  On a daily basis.

Risk                 High                                               Low

Default      As they are private agreement,            No such probability.

                  the chances of default are

                    relatively  high.

                     

Size of contract    Depends on the contract terms.         Fixed

Collateral Not required                                   Initial margin required.

Maturity     As per the terms of contract.                Predetermined date  

Regulation       Self regulated                             By stock exchange

  Liquidity             Low                                                  High

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