Futures vS Forwards like, question, really, might, which

noel

I know this question might annoy a lot of you but i would really like to get some inputs on which of the two topics can i grasp quicker. I really don't have luxury of time to read both

mengxu

they are 90% the same, hit 2 birds with one stone bro.
haha

read forwards, and then note the difference b.t for and fur.

then you are pretty much 90% done with that section



Edited 1 time(s). Last edit at Sunday, May 29, 2011 at 02:16PM by passme.

Analyze_This

Forwards are the building block of futures. They're not that different from one another. There are some fundamental differences between the two that you should know:

Futures are public, exchange based and pre-set, contracts that are backed by a clearing house. There has never been a default between either party over the history of the futures markets due to this setup. Forwards are private contracts that are negotiated between two parties. The value of a futures contract resets daily as they are market to market every day. So technically a futures contact only really has value during the trading day. Contango occurs when the futures price trades above the current spot price producing a negative roll yield while backwardation occurs when the futures price trades below the spot price resulting in a positive roll yield. Futures have storage costs and convenience yields.

The formulas aren't that different between the two.



Edited 1 time(s). Last edit at Sunday, May 29, 2011 at 02:23PM by Chuckrox8.

ayodayo

Thanks guys _ i understand the fundamental differences between the two its more the areas related hedging and valuation where I thought there might be difficulties in mastering both. And i need to go back to review the rest of the mammoth Material - God I need to be on an adrenaline rush for the rest of the week..

tobeornottobe

the important difference between forward and futures is that since futures are standardized and publicly traded, they are often marked to market, which substantially reduces credit risk. Because of this small difference, futures and forwards can be priced differently.

If the underlying asset is positively correlated to interest rates, the futures price will be above the forward price, all else equal. This is because marking to market, allows for gains on a futures contract to be reinvested at higher market rates, whereas with the forward, one must wait until expiration. The opposite is also true. If the asset is negatively correlated with interest rates, the forward will be higher than the futures contract.