Forward contracts are usually privately agreed by both parties to the transaction, which can adapt to various customization needs. Because the terms of the contract and the transaction object are agreed by both parties, the transaction price of forward transactions can change according to market conditions. Forward contracts have no restrictions on the types and quantity of the subject matter, so they are usually used for customized transactions or commodity transactions that require special support. However, because the forward contract has no transparent market price, the transaction efficiency is low and the transaction liquidity is poor.
Futures contracts are standardized contracts, which stipulate the types of subject matter, delivery quantity, trading time and place, etc. Their delivery to the exchange is comprehensive and supervised, realizing the advantages of market transparency and high liquidity. Because the delivery date and delivery variety of futures trading are predetermined, the price of futures trading is determined by the relationship between supply and demand in the market, and the transaction price is more open and transparent. However, the standardization requirements of futures contracts limit the application of diversification and customization of futures contracts. In addition, futures trading is leveraged and requires investors to have high risk tolerance.
Generally speaking, forward contracts are suitable for investors who need personalized trading, while futures contracts are suitable for investors who want to be supervised by exchanges and get open and transparent market prices.