Key Difference: A forward contract is a non-standardized contract that allows parties to customize how they want to sell or buy an asset, at which price and what date. On the other hand, a future contract is a standardized contract that requires futures exchange to act as an intermediary between the buyer and the seller for purchasing and selling an asset at a certain date in the future and a specified price.

The world of trading is a confusing one, with many unclear concepts and so many different terms. It is understandable to lose track of so many different words and ideas because of the vast knowledge required to completely comprehend the workings of the trading market. Forward contract and Future contract are two different types of trading contracts that are used to trade a certain commodity in the future at a fixed price and delivery date.

Both the contracts are similar in nature because they both offer the same function: the ability to buy and sell a specific type of asset at a specific time and price. However, they differ when it comes details of how each obligation is fulfilled.

A forward contract is a non-standardized contract that allows parties to customize how they want to sell or buy an asset, at which price and what date. On the other hand, a future contract is a standardized contract that requires futures exchange to act as an intermediary between the buyer and the seller for purchasing and selling an asset at a certain date in the future and a specified price.

The main difference between the two contracts are the rigid structure of the future contract that does not allow for many customizations. While, the forward contract is more of a private agreement between two parties that allow the contracts to be customized any way the parties agree on.

This results in a higher risk factor with the forward contracts, because of the lack of mediating party. In terms of a future contract, the futures exchange acts as the mediator – wherein the parties are not exactly selling or buying from each other but directly from the exchange.

The need for goods in exchange of money or other goods has allowed the market to flourish. The world has evolved from originally using word of mouth for bartering to signing agreements to determine the price of goods and delivery date. The concept gained popularity because of the farmers, where they would receive guarantee that they would be paid for their crops at certain rate when they are harvested. Similarly, the customer would have guarantee that he would be given the product at a certain price when harvested.

However, not always were contracts and agreements kept. Hence, rose the need for a future contract where future exchange managed all transactions and contracts. They also charge a minimal amount that is required to be paid to the exchange, known as the initial guarantee fee. This helped reduce the risk of the parties defaulting on their payments or providing the goods.

Lastly, the purpose each contracts are used for differ. Forward contracts are commonly used for hedging, while the future contracts are used for speculation.

Comparison between Forward Contract and Future Contract

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