How do forward and futures markets differ?© BrainMass Inc. brainmass.com March 4, 2021, 8:02 pm ad1c9bdddf
While futures and forward contracts are both a contract to deliver a commodity on a future date at a prearranged price, they are different in several respects:
Forwards only transact when purchased and on the settlement date. Futures, on the other hand, are rebalanced, or "marked-to-market", everyday to the daily spot price of a forward with the same agreed-upon delivery price and underlying asset.
The lack of rebalancing of forwards means that, in some cases, due to movements in the underlying's price, a large differential will build up between the forward's delivery price and the settlement price.
This means that one party will incur a big loss at the time of delivery ...
This solution discusses how forward and futures markets differ.