Future and Forward Contract

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Futures contracts are exchange-traded and, therefore, are standardized contracts. Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement. Futures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never. Secondly, the specific details concerning settlement and delivery are quite distinct. For forward contracts, settlement of the contract occurs at the end of the contract. Futures contracts are marked-to-market daily, which means that daily changes are settled day by day until the end of the contract. Furthermore, settlement for futures contracts can occur over a range of dates. Forward contracts, on the other hand, only possess one settlement date. In both Future and Forward contracts there have to be buyer and sellers. The person who agree to buy the underlying assets in such a contract is known as long and he is said to assume a long position .The counter party who agree to sell the underlying assets as per the contract is known as short and he is said to assume a short position. Thus the long agree to take the delivery of the underlying asset on future date ,while short agree to make delivery on that date. The difference between two type of contract is Futures contracts are standardized whereas Forward contracts are customized. The major terms and conditions: 1)How many units of the underlying asset is the long supposed to acquire or how many units of the asset does the short have to deliver. 2)What is the acceptable grade or grades of the underlying asset that is allowable for delivery? 3)Where should the delivery should be made? Is it possible only at the

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