DERIVATIVE SEGMENT – 6

INTRODUCTION TO FORWARDS

A forward contract is an agreement made directly between two parties to buy or sell an asset on a specific date in the future, at the terms decided today Forwards are websites used in commodities, foreign exchange, equity, and interest rate markets.

FEATURES – It is a contract between two parties.

All terms of the contract like price, quantity and quality of underlying, delivery terms like place, settlement procedure, etc.. are fixed on the day of entering into the Contract.

MAJOR LIMITATION OF FORWARDS

LIQUIDITY RISK – It is nothing but the ability of the markets participants to buy or sell the desired quantity of an underlying asset .As forwards are tailor made contract the terms of the contract are according to the specific requirements of the parties .
COUNTERPARTY RISK – Counterparty risk is the risk of an economic loss from the failure of counterparty to fulfil its contractual obligation.

INTRODUCTION TO FUTURES

Futures markets were innovated to overcome the limitation of forwards. a futures contract is an agreement made through an organized exchange to buy or sell a fixed amount of a commodity or financial asset on a future date at an agreed price. simply, futures are standardized forward contracts that are traded on an exchange. the clearinghouse associated with the exchange guarantees the settlement of these trades. a trader, who buys futures contracts, takes a long position and the one, who sells futures takes a short position. the words buy and sell are figurative only because no money or underlying asset changes hand, between buyer and seller, when the deal is signed.