{"id":27855,"date":"2015-04-02T12:50:03","date_gmt":"2015-04-02T12:50:03","guid":{"rendered":"http:\/\/vskills.in\/certification\/blog\/?p=27855"},"modified":"2024-04-03T13:23:01","modified_gmt":"2024-04-03T07:53:01","slug":"future-and-forward-contracts","status":"publish","type":"post","link":"https:\/\/www.vskills.in\/certification\/blog\/future-and-forward-contracts\/","title":{"rendered":"Future and Forward Contracts"},"content":{"rendered":"

\"Future<\/a><\/p>\n

A forward \u00a0or a future is a financial contract obligating a \u00a0buyer to purchase\u00a0\u00a0an asset or the seller to sell an asset at a predetermined future date and price.The asset being bought and sold can be a\u00a0physical commodity or a financial instrument.Some forwards contracts may call for physical delivery of the asset but most of them are settled in cash. The forward has two purposes they are the hedging and speculative purpose.
\nAlex owns a iron mine and he is worried about \u00a0the prices falling in the next 2 months and Toyota,a car manufacturer uses a lot of iron and \u00a0is worried about the price rising of iron in the 2 few months.Alex can now enter into a forwards contract with Toyota to sell a definite quantity of iron at a fixed but a reasonable rate .On maturity of that date Alex sends over the predetermined price of iron and Toyota pays the amount to Alex closing the contract.<\/p>\n

Here both Alex and Toyota have successfully hedged their risks.Alex would be in a trouble if the prices were to plunge and Toyota would suffer if the prices rose so both of them using a forwards contract have reduced the risk borne by them to another person.In this contract both parties cant win and one stands to lose.If the market prices were lower than the agreed prices then Toyota would lose money and if the prices were higher Alex would suffer.<\/p>\n

Avi and Mustafa are two speculator and want to earn money in the forward market. Avi \u00a0predicted that the price of the gold would fall. Mustafa on the other hand thought that the prices would rise because of increased demands so he entered into a futures contract with Avi.He agrees to but the gold from Avi at INR 1,00,000 whatever the market price might be and Avi to sell at the quoted price in the next month.Now,if the prices increase to INR 1,20,000 then Avi is in a loss and need to either by gold at the market price and sell at agreed price \u00a0to settle the contract,but if the prices were to fall to say INR 70,000 then Avi could buy gold at that price and sell it to Mustafa at INR 1,00,000 as per the agreement.<\/p>\n

In cases they don,t want any possession of goods then Avi can simply pay Mustafa INR 20,000 in the first case as it the amount he actually earns and in the second case Mustafa should pay Avi INR 30,000 to execute the contract.
\nForward and Futures contracts are quite similar in nature as both of the contracts allow people to buy or sell a specific type of asset at a specified time at a fixed price.The major difference between the two is that future contracts are exchange traded and therefore are standardized.Forward contracts on the other hand are private agreements between two parties and aren’t that rigid in their stated terms and conditions and as they are\u00a0private agreements there is always a chance that a party may default\u00a0on its side of the agreement. Future contracts have drastically lower chances of default as they are quiet well regulated.Forward contracts are usually \u00a0settled at the end of the time period whereas \u00a0futures contracts are marked to market\u00a0daily which means that changes in price occurring at each particular day are settled day by day until the end of the contract.Forwards and futures are basically the same except for the exchange traded and daily settlement feature.<\/p>\n

Futures and forwards are a type of derivatives which are basically used for speculative and hedging purpose and can act as a good source of earnings provided that can make correct decisions and decide the future trend in the economy.Many banks and other financial institutes take active participation in these type of contracts.<\/p>\n

Click here for government certification in Accounting, Banking & Finance<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

A forward \u00a0or a future is a financial contract obligating a \u00a0buyer to purchase\u00a0\u00a0an asset or the seller to sell an asset at a predetermined future date and price.The asset being bought and sold can be a\u00a0physical commodity or a financial instrument.Some forwards contracts may call for physical delivery of the asset but most of…<\/p>\n","protected":false},"author":972,"featured_media":27873,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_joinchat":[],"footnotes":""},"categories":[1519],"tags":[2044,2954,2953,2952,1770,2922],"class_list":["post-27855","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting-banking-and-finance","tag-derivatives","tag-exchange-traded","tag-forwards","tag-futures","tag-investment","tag-tool"],"acf":[],"yoast_head":"\nFuture and Forward Contracts - Vskills Blog<\/title>\n<meta name=\"description\" content=\"What are Future and Forward Contracts?\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.vskills.in\/certification\/blog\/future-and-forward-contracts\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Future and Forward Contracts - 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