Introduction to Futures and Forwards
Both contracts obligate a transaction at an agreed price on a future date. The difference is in the plumbing, and the plumbing has real economic consequences.
Forwards
Bilateral, over the counter, customisable in size, date and underlying. Nothing changes hands until maturity.
That flexibility suits a genuine hedging need. A company expecting €7.3m on a specific Tuesday can get exactly that contract, which no standardised instrument would provide.
The cost is counterparty risk. Your gain is only as good as the other side's ability to pay, and since nothing settles until maturity, exposure accumulates for the life of the contract.
Futures
Exchange-traded and standardised: fixed sizes, fixed dates, defined delivery terms. You cannot customise, but you gain three things.
Central clearing. The clearing house becomes counterparty to both sides, so you face the exchange rather than an individual firm.
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