This document defines and compares futures contracts and forward contracts. A futures contract is a standardized agreement traded on an exchange to buy or sell an asset at a predetermined price and date. A forward contract is a private agreement between two parties for the purchase or sale of an asset at a specified future date. The document outlines the functions of hedging, speculating, and market making for futures and forward users. It provides examples of different types of futures contracts including commodities, equities, currencies, metals, and financial futures. The main differences between futures and forward contracts are that futures have no default risk, daily profit/loss settlement, and public trading, while forwards pose a default risk and profits/losses are realized at expiry through
2. Definition of futures Contract
A futures contract is a standardized
contract, traded on a futures exchange,
to buy or sell a certain underlying
instrument at a certain date in the future,
at a specified price.
3. A forward contract is an agreement
between two parties to buy or sell an
asset (which can be of any kind) at a pre-
agreed future point in time.
Definition of forward Contract
4. Hedging : Techniques that attempts to reduce risk.
Speculators : Use futures & forward contract to
acquire risk.
Market Makers: company or an individual, that
quotes both a buy & sell price in a
financial instrument, hoping to
make a profit on the bid-offer
spread.
Function of futures & forward contract
6. Financial Futures
3 Month Kuala Lumpur Interbank Offered Rate Futures
(FKB3)
3-Year Malaysian Government Securities Futures
(FMG3)
Year Malaysian Government Securities Futures (FMG5)
Types of futures contract
7. Currencies Futures
United States Dollar (USD)
Japanese Yen (JPY)
Etc.
Metals Futures
Gold
Silver
Copper
Etc.
Types of futures contract
8. Differences between futures & forward contract
Futures Contract Forward Contract
No default risk. Rare default risk Exist.
Daily settlement of profit and
loss, which is known as mark to
market.
The profit or loss is accumulated
till the expiry of contract.
Publically traded. Privately traded.
Product issued by Bursa
Malaysia.
Product issued by individual &
firms.
Quoted and traded on the Bursa Negotiated directly by the buyer