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FRM-1 Study Notes

Forwards vs. Futures contracts

  • Forwards
    • Not traded on exchanges
    • Are private agreements between two parties and are not as rigid in their stated terms and conditions
    • Credit risk is high
    • High customization
    • Settlement at the end of contract and on a
      specific date
    • Mostly used by hedgers that want to remove the volatility of the underlying, hence delivery / cash settlement usually takes place
  • Futures
    • Traded on exchanges
    • Standard contracts
    • Clearing house and daily mark to market reduces credit risk
    • Settlement can occur over a range of dates
    • Usually closed out before maturity and hardly any deliveries happen

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