Futures and forward contracts. Main characteristics, regulatory requirements

Academic Paper from the year 2019 in the subject Economics - Finance, grade: 1,0, University of Portsmouth, course: International Banking and Financial Instruments, language: English, abstract: This essay aims at explaining futures and forward contracts, describing their origins and purpose of usage as well as regulatory requirements. Moreover, it discusses advantages and disadvantages. Futures and forward contracts are financial instruments. More specifically, they are derivatives. Derivatives are financial contracts that derive their value from an underlying asset (Hirsa & Neftci, 2014). The literature distinguishes between physical commodities, such as corn or precious metals, and financial instruments, for example bonds, stocks or currencies, as underlying assets (Gottesman, 2016). Futures and forwards are agreements to buy or sell the underlying at a precise time in the future for a specified price, strike price. Their difference is that futures are traded on an exchange, whereas forwards are traded in the over-the-counter (OTC) market, meaning off-exchange trading directly between two parties (Hull, 2016). Consequently, futures are standardized, whereas forwards can be privately negotiated.