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    How do forward and futures markets differ?

    © BrainMass Inc. brainmass.com March 4, 2021, 8:02 pm ad1c9bdddf

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    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 ...

    Solution Summary

    This solution discusses how forward and futures markets differ.