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Forwards and futures. What is the difference between a forward and a futures contract? How are...

Forwards and futures. What is the difference between a forward and a futures contract? How are they similar?

a. A firm owes €1,000,000 in 60-days and hedges this payable with a forward at a rate of $1.16. The current spot rate is $1.14, and the firm expects the spot rate in 60-days to be $1.15. How much will the payables cost the firm?

b. How is the premium calculated?

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Answer #1

Differences:

Forward Contract Futures Contract
Tailored Standardized
Traded over the counter traded on standardized stock exchanges
Settled on the maturity date Settled on a daily basis

Since the futures trade signify obligations, the firm will use the futures contract to convert €1,000,000 rate of $1.16/€
Hence, payables cost the firm = €1,000,000 * $1.16/€ = $1,160,000

Premium is future's strike price - Expected future spot value = $1.16/€ - $1.15/€ = $0.01/€


Please do rate me and mention doubts, if any, in the comments section.

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