Question

What are the differences between futures and forward markets in terms of counterparty credit risk (3pts), contract terms (3pts), delivery expected (3pts), timing flexibility (3pts), regulation (3pts), liquidity requirements (3pts), and capital requirements (2pts)?

Answer 1

Point of difference	Forward	Futures
Counterparty credit risk	Credit risk is high	Counterparty credit risk is low due to the presence of clearing hoise or exchange.
Contract terms	It is customised	It is standardized
Delivery expected	Delivery is done at a specified date.	There are a range of delivery dates. And are usually settled prior to delivery.
Time flexibility	It is more flexible in terms of contract, but less flexible in terms of time, as settlement is done on maturity date.	It is less flexible as it is standardized, but more flexible in terms of time , as it is settled on daily basis, and can also be settled prior to delivery.
Regulation	self regulated	Regulated by stock exchange
Liquidity requirement	No liquidity requirement, as money is paid only at settlement date. It is less liquid.	Liquity requirement is higher than forward because they need to maintain the margin. If balanve goes below margin, then money needs to be added to account. It is more liquid as it is traded on exchange.
Capital requirement	No initial payment is required.	Margin amount is required to be maintained anytime.