A forward contract is a customised OTC derivative where two parties agree to transact a specific asset at a predetermined price on a specific future date. Unlike futures, forwards are not exchange-traded and have no daily MTM settlement.
Forward vs Futures
| Feature | Forward | Futures |
|---|---|---|
| Trading | OTC (bilateral) | Exchange-traded |
| Standardisation | Customised | Standardised (lot size, expiry) |
| Counterparty Risk | Yes (credit risk) | No (CCP guarantees) |
| Settlement | At maturity | Daily MTM + final |
| Liquidity | Low (no secondary market) | High (exchange market) |