The main differences between contracts and forward contracts are as follows: 1. Different market nature Foreign exchange futures contracts are traded on exchanges, while foreign exchange forward contracts are traded at bank counters.
2. Maturity Date Different foreign exchange futures contracts have a standardized maturity date of month and day, while the maturity of foreign exchange forward contracts is tailored to the customer’s needs, usually within one year.
3. Method of price determination The price of different foreign exchange futures contracts is determined through an open bidding process on an exchange or through an electronic trading system.
The bid and offer prices for forward currency contracts are determined by dealers in the wholesale market after taking into account and differentials.
4. Ways to prevent default Different Foreign exchange futures contracts control customers’ credit risks by relying on margin requirements and daily evaluation system to prevent and stop the occurrence of default events.
There are no margin requirements for currency forwards, but banks do conduct credit checks on customers or offer forward contracts only to customers with good long-term relationships.
5. Delivery methods: The settlement of different parts of the foreign exchange futures contract rarely takes physical delivery, but mostly adopts cash delivery;
Foreign exchange forwards are almost entirely physical delivery.
6. Transaction cost The transaction cost of different foreign exchange futures contracts is commission, while the foreign exchange forward contracts do not charge commission, but the bid-ask spread is actually a form of “commission” received by the bank.
7. Length of Trading hours The foreign exchange futures contracts are traded during the business hours set by the exchange.
Forex forwards are traded 24 hours a day through the bank’s global network.
