Forward vs Futures in Forex: Relationship & Differences

2023-06-05
Summary:

Explore the relationship between forex forwards and futures. Learn essential trading formats and tools to navigate the forex market effectively.

Forward foreign exchange trading and futures foreign exchange trading have some similarities in concept, so many people often confuse them, but in fact, the two have differences in many aspects.

What is the relationship and difference between forward foreign exchange trading and foreign exchange futures trading?

The Relationship and Differences between Forward Foreign Exchange Trading and Foreign Exchange Futures Trading

Forward Exchange Transaction

Forward foreign exchange trading refers to a transaction in which both parties do not immediately handle delivery after the transaction is completed, but rather agree on transaction conditions such as currency, amount, exchange rate, and delivery time in advance, and only proceed with actual delivery upon expiration.


Forex Futures Transaction

Futures foreign exchange trading refers to a foreign exchange delivery method in which both buyers and sellers, after publicly bidding in futures trading, deliver at the agreed exchange rate within the expiration date specified in the contract. This is a contract signed by both buyers and sellers in the agreed quantity, price, and delivery date.


From the above definition, we can see that both transactions are actually delivered at a predetermined exchange rate on a certain agreed date. What is the difference between them?


Delivery method: Although the delivery forms of the two are similar by definition, in most cases, only a small number of foreign exchange futures contracts will actually be delivered on the expiration date, and most futures contracts are settled through hedging before the expiration date; Most forward foreign exchange transactions will be redeemed at actual delivery on the agreed delivery date.


Delivery period:The transaction amount and delivery period of forward foreign exchange transactions are freely negotiated and determined by both parties. Foreign exchange futures trading has standardized and unified regulations for the above matters. Foreign exchange futures contracts stipulate that the expiration date of the contract is the Wednesday of the third week of the delivery month (the delivery months for different varieties are completely different, and the delivery months for foreign currency futures are generally March, June, September, and December of each year).


Trading format: Foreign exchange futures trading is conducted through public bidding on futures exchanges, while the forward foreign exchange market is conducted through telecommunications tools and the buying and selling prices are simultaneously quoted. In foreign exchange futures trading, the trading parties do not contact each other, but each settles with a clearing house as an intermediary to bear the credit risk.


Trading tools: Let's take a closer look at the trading tools of both, namely the subject matter. Foreign exchange futures are traded in foreign exchange futures contracts, while forward foreign exchange is traded in forward foreign exchange contracts. The specific difference is that foreign exchange futures contracts are standardized contracts, and the transaction amount is expressed in terms of the number of contracts. The amount of each contract varies depending on the currency type, and the currency is limited to a few major currencies; There are no fixed regulations for the trading tools of forward foreign exchange contracts, and the details on the contract are mutually agreed upon by the trading parties. There are no special restrictions on the trading time, location, price level, and market disclosure.


Trading venue: Foreign exchange futures trading is conducted by floor brokers and floor traders in highly standardized futures exchanges managed by the government, with strict trading rules and procedures; Forward foreign exchange trading is conducted off the exchange and generally does not have a fixed trading venue.


Trading participants: In the foreign exchange futures market, any investor who deposits margin in accordance with regulations can engage in foreign exchange futures trading through foreign exchange brokers with clearing membership in futures exchanges, thus making foreign exchange futures trading a dynamic and efficient market; In the forward foreign exchange market, there are no restrictions on the trading qualifications of traders, but most participants are professional securities traders or large manufacturers with good relationships with banks. It is extremely difficult for individual investors and small and medium-sized enterprises who have not obtained credit limits from banks to participate.


Trading rules: The margin system is adopted for foreign exchange futures trading. Every day's trading must be cleared through the clearing house. Surplus people can withdraw excess cash, while losers need to pay margin. Forward foreign exchange transactions do not require margin, and both parties only settle at maturity and delivery.


Contract transfer: Foreign exchange futures contracts are transferable, while forward foreign exchange contracts are non transferable, resulting in weaker liquidity.


【 EBC Platform Risk Reminder and Disclaimer 】: There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice.

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