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Futures and Forwards

In: Capital Market Finance

Author

Listed:
  • Patrice Poncet

    (ESSEC Business School)

  • Roland Portait

    (ESSEC Business School)

Abstract

A forward or a futures contract fixes today the terms of a transaction to be carried out on a future date. In organized exchanges, futures contracts are standardized in their amounts, maturities, and the quality of the underlying asset. They are subject to daily margin calls and cleared by official clearing houses. As a result, they are practically void of counterparty risk. By contrast, forward contracts are traded over the counter, tailor-made, and flexible as the parties design the terms of the contract at their own convenience, but are in general less liquid and fraught by counterparty risk. After a general presentation of futures and forwards, we examine the relationship between the forward/futures price and the spot price (cash and carry). We then study hedging with these instruments and finally present the main contracts according to their underlying assets.

Suggested Citation

  • Patrice Poncet & Roland Portait, 2022. "Futures and Forwards," Springer Texts in Business and Economics, in: Capital Market Finance, chapter 9, pages 311-352, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-84600-8_9
    DOI: 10.1007/978-3-030-84600-8_9
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