Difference Between Forward And Futures Contract

Last Updated: 26 Aug 2025

Professional investors who have been investing for numerous years swear by learning about the important trading techniques and strategies. Suppose anyone wants to create a robust investment portfolio. Among numerous investment instruments and trading techniques that can allow investors to ensure a profitable portfolio, derivatives trading is a key technique.

However, investors can use numerous derivative instruments to achieve their portfolio goals. Since the amount of money involved in derivative trading is always significantly high, it is vital that you first understand the types of derivatives in detail.

One thing that confuses almost every beginner derivative investor is the difference between futures and forward contracts. This blog will attempt to provide knowledge about the difference between the two derivative contracts and let you pick the ideal one before you start trading. But first, a little about derivatives trading.

What is Derivatives Trading?

Fundamentally, derivative trading is conducted based on the price movement of the derivative product’s underlying asset. These assets could be stocks, currencies, bonds, commodities, and so on. There are two types of derivative trading: standardised financial contracts with a stock exchange as a counterparty, and private contracts between parties, without a formal intermediary. While the former is known as Exchange Traded Derivatives, the latter is called Over-the-Counter (OTC) derivative trading.

What is a Futures Contract?

A future contract, also known as futures contract, is a standardised financial contract traded through stock exchanges. Under a futures contract, a predetermined quantity and price are agreed upon, payable at a specific future date. The parties in a futures contract are legally bound to exercise the contract.

In a futures contract, the standardised terms and conditions include:

• The volume of trade.
• Delivery date.
• Credit procedure.
• Other technical specifications.

What is a Forward Contract?

A forward contract, also known as a forward, is a private agreement between two parties to purchase or sell the underlying asset at a predetermined time at a specific price. You can learn about the profit or loss accruing from a forward contract only at the date of settlement of the contract.

A forward contract is available for trading in different OTC derivatives, such as stocks, commodities, and so on. For instance, in India, you can have a forward contract for currencies, which are outside the specified list by stock exchanges and are managed and regulated by two private parties.

Difference Between Forward And Future Contracts

You can refer to the chart given below to understand the key differences between the two contracts.

Basis	Future Contract	Forward Contract
Settlement	Daily, by the stock exchange.	On the maturity date as negotiated between the parties.
Regulation	Regulated by market regulators such as the Stock Exchange Board of India (SEBI).	Self-regulated.
Collateral	Margin requirements as per the stock exchange rules.	Zero requirements of initial margin.
Maturity	On a predetermined date.	According to the terms of the private contract.
Structure, Scope & Purpose	Standardised with uniform terms and margin payments.	Customised terms tailored to the parties’ needs. Low liquidity is commonly used in OTC currency and commodity markets.
Transaction Method	Regulated and executed through stock exchanges under a government-approved framework.	Privately negotiated between buyer and seller without any regulatory intermediary.
Price Discovery Mechanism / Pricing	Transparent pricing with efficient price discovery due to standardisation and exchange-traded nature.	Opaque pricing with inefficient discovery due to informal, decentralised negotiations.
Risks Involved	No counterparty risk; the stock exchange guarantees performance. Daily mark-to-market settlements reduce default risks.	High counterparty and default risk; no third-party guarantee on contract enforcement or payment settlement.

 

Futures Contract Example

Consider the following example of a futures contract with currency as the underlying asset, known as an FX Future. Using a currency futures contract, you can exchange one currency with another on a given date in the future at a rate fixed on the date of the purchase. In India, you can use the future contracts on four pairs of currencies:

• Indian Rupees and US Dollars
• Indian Rupee and United Kingdom Pound Sterling
• Indian Rupee and Euro
• Indian Rupee and Japanese Yen.

Furthermore, you can also use futures contracts to trade in other segments, like commodities and stocks.

Forward Contract Example

Let’s understand a forward contract with a simple example related to currency exchange, also called a currency forward. Think of an Indian exporter who is expecting to receive $100,000 from a US buyer after three months. To avoid any risk from changes in the exchange rate, the exporter makes a forward contract with a bank. He agrees to sell $100,000 to the bank at a fixed rate of ₹83 per dollar, to be settled exactly three months later.

No matter what the actual exchange rate is on that day, the exporter will get ₹83 lakhs from the bank. This fixed rate removes any uncertainty and protects him from possible currency losses.

The settlement process in forward contracts occurs only on the maturity date, based on the agreed-upon terms. This is a major difference between forward and future market transactions.

Another difference between forward contracts and futures contracts lies in standardisation. Forward contracts are tailored to suit the needs of the contracting parties, including the amount, settlement date, and currency, making them suitable for businesses looking for personalised hedging solutions outside the formal exchange systems.

Conclusion

Now that you understand forward contract vs future contract, you’re ready to begin your investment journey with more clarity and confidence. But before you start, keep in mind that knowing about futures vs forwards, and having a trusted financial partner can make a big difference in helping you make smart choices. A well-known broking firm can offer several benefits, like zero fees for opening a demat and trading account, no demat annual maintenance charges for the first year, and advanced trading platforms.