Forwards and Futures - Instrument Basics › Forwards vs. Futures: Key Differences
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While forwards and futures serve similar economic purposes, their structural differences have important practical implications:
| Feature | Forward | Futures |
|---|---|---|
| Trading venue | OTC (bilateral) | Exchange |
| Standardization | Customized | Standardized |
| Counterparty risk | Direct exposure to counterparty | Clearinghouse guarantee |
| Margin | Typically none (may use CSA) | Required |
| Settlement | At maturity | Daily marking to market |
| Liquidity | Limited | High for active contracts |
| Transparency | Prices are private | Prices are public |
The daily settlement of futures creates a subtle but important difference in pricing. Because futures gains and losses are realized daily while forward gains and losses accumulate until maturity, the two contract types have different exposures to interest rate movements. When asset prices and interest rates are positively correlated, futures are worth slightly more than forwards because gains are received (and can be reinvested) when rates are high. This difference is typically small but can matter for longer-dated contracts.
For most practical purposes, the prices of forwards and futures on the same underlying with the same maturity are very close, especially for short-dated contracts. The convenience of exchange trading, standardized contracts, and clearinghouse guarantee makes futures the preferred instrument for most market participants.