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Consider the differences between currency Futures and Forward contracts. When would Futures be used? When would forwards be used? A forward contract is tailor made for a client by his international bank. In contrast, a futures contract has standardized features and is exchange traded, that is, traded on organized exchanges rather than over the counter. A client desiring a position in futures contracts contacts his broker, who transmits the order to the exchange floor where it is transferred to the trading pit. With features such as the contract size, a futures contract is written for a specific amount of foreign currency rather than for a tailor made sum. A forward contract states a price for the future transaction. A future contract states marked to market, daily at the settlement price. Both forward and futures markets for foreign exchanges are very liquid. In the forward market, the investor holds offsetting positions after a reversing trade; in the futures market the investor actually exits the marketplace. In forward markets, approximately 90 percent of all contracts result in the short making delivery of the underlying asset to the long. By contrast, only about 1 percent of currency futures contrast result in delivery. Forward contracts may be privately executed between two parties who know each other (figuratively speaking, ex; Farmer and Cereal Company). Futures contracts may be used to have someone else to buy or sell, not knowing who the other party is. Unlike forward contracts, where each side is exposed to the credit risk of its counter party, with futures, the exchange (third party) assumes the credit risk if a party defaults on its obligations. The exchanges are, in turn, backed by insurance policies, lines of credit, and the financial strength of their
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