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What is the difference between the forward and the futures markets? What are the pros and...

What is the difference between the forward and the futures markets? What are the pros and cons associated with using each one?
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Answer #2

1. Futures is an exchange traded market whereas forwards are over the counter

2. In futures initial and maintenance margin requirements are required to be maintained while it is not required in forwards

3. There is a mark to market feature daily on futures while it is not there on forwards

Future markets have less risk since an exchange monitors the participants. By posting margin requirements future markets ensure that the contract is fulfilled appropriately. This is not in case of forwards which may be riskier.

In case of posting margins draws on funds that can incur an indirect cost of capital. Moreover futures have definite lot size and cannot be tailored like a forward.

answered by: anonymous
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