Forward and futures contracts involve the agreement between two parties to buy and sell an asset at a specified price by a certain date. A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter (OTC).
What are futures & how do they work?
Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
Who is obligated to deliver a futures contract?
Buyers of futures contracts are obligated to take delivery of the underlying asset when the contract expires, and sellers are obligated to deliver. Some contracts require the delivery of a physical asset, while others are cash-settled. Futures track a wide range of commodities and financial assets.
What happens when a futures contract expires?
The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.
