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 Comparison

 

Forwards

Futures

      Private contracts

      Unique contacts

      Default risk

      Little or no regulation

      Exchange-traded

      Standardized contracts

      Guaranteed by clearinghouse

      Regulated

 

Long must pay a certain amount at specific future date to short, who will deliver the underlying asset.


 

Example

6-month forward on gold is quoted at $990/oz. Size of contract =100 oz.

Solution

At maturity, long pays short $99000, short delivers 100oz of gold to long.

 Cash settlement fwd contract

 

A cash settlement fwd contract does not require actual delivery of the underlying asset, but a cash payment of the difference b/w market price of the asset & contract price at settlement date to the counterparty.

 
 

Example

6-month forward on gold is quoted at $990/oz. Size of contract =100 oz.

Solution

If spot price at maturity = $1010,
short pays long $2000 ($20 * 100).

Early termination can be achieved by entering into a new forward contract with the opposite position. This will fix the amount of payment to be made / received at settlement date.

 





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