Based on the rights and obligations of the parties that enter into the contract, derivatives can be classified into two groups: forward commitments and contingent claims.
A forward commitment is an agreement between two parties in which one party agrees to buy and the other agrees to sell an asset at a future date at a price agreed on today. In essence, a forward commitment represents a commitment to buy or sell.
There are three types of forward commitments.
Anyone who wishes to trade a U.S. Treasury bond futures contract on the CBOT must accept these terms. If a customized contract is desired, a forward contract is the only alternative.
Standardization of futures contracts promotes liquidity. Since futures contracts are standardized with generally accepted terms, they have an active secondary market where previously created futures contracts are bought and sold.
In contrast, forward contracts are customized and therefore usually do not trade after being created.
In contrast, there is no clearinghouse in a forward market. Traders in the forward market have direct obligations to each other. However, traders often do not know each other and cannot evaluate each others' credit risks, so they are concerned with the reliability of their counterparties.
Forward contracts, on the other hand, are typically settled at expiration. Until then, no money changes hands between the counterparties.
The price of futures transactions is available to the public through price-reporting services.
| wenny: Forward and Futures|
trading place: over the counter; organized exchanges.
terms and conditions: customized; standardized.
default risk: yes; no.
settlement date: expiration date; settled on a daily basis, and a party can offset his position by entering into an opposite transaction.
regulations: private unregulated; regulated.
|achu: Units of futures contract price are standardized (though what you pay for a future can be negotiated.)|
|prachirp: well summarised by wenny|
| jainrajeshv: thanks wenny|
| BunnyBaby: Attempted to create a summary :s|
Types of forward commitments
1. Forward contract
-Bought/Sold in the over the counter market
-Negotiated now, settled at future date, no money exchanges until then
-Parties specify contract terms & conditions, when and where of delivery, precise indentity
of the underlying security (unlimited customization)
-More risk involved, must trust the other party, harder to evaluate others' credit
-Private and unregulated
-Little to no liquidity
? Are there any advantages to trading in forward contracts vs futures
-Committment to buy or sell at a specific price at a future (haha) date
-Highly standardized, dare I say generic?
-Detailed yet standard specifics with *probably* no customization
-Terms are set by the exchange such as minimum values and price changes
-Must accept the terms to trade on the Exchange *(my way or the highway)
-Advantage to futures, since standardized active secondary market, makes the contracts more
liquid; less risk since contracts are guaranteed by the clearinghouse which acts as
-Downside to futures exchanges, each trader must post margin (barrier to entry for traders
without a lot of capital), all gains and losses must be "marked to market" settled at the
end of the trading day. therefore money changes hands every day
-Information about trades and prices are publicly available and reported to at least one
? Will we need to know how specific exchanges function
? Do all exchanges have clearinghouse
-Agreement between two parties to exchange a series of future cash flows; series of forward
-Lots of customization available
-Private and avoids regulation
| omya: clearing house acts as a intermediary to buyers and sellers.|
performance for the futures exchange is promised by clearing house.
practice of daily settling of futures contarct means they are terminated everyday and the fresh contract is started on the next day.
|fenix: I believe the practice is EQUIVALENT = doesn't mean they are actually terminated and reopened each day|
|floydbite: can someone please explain to me how the minimum price is $31.25 in the above example for tick size :(|
| To-be-CFA: Types of Forward Commitments:|
I. Forward Contract  Legally binding agreement to buy/sell an asset in the future at a specified price.
- Buyer/seller is obligated to perform.
- Each party is subject to default risk.
- Private and largely unregulated.
II. Futures Contract  Similar to forward, but traded on exchanges.
- Everything standardized.
- Active secondary market.
- Guaranteed by a clearinghouse. Highly capitalized and backed by credit lines.
- Requires that traders post margin in order to date (Daily Settlement/Marking to Market)
- Regulated by at least one regulatory agency.
III. Swap  Series of forward contracts.
|enetis: $100,000 par x 1/32% (1 tick)|