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.