Forwards and Futures Contracts

A forward contract is made directly between two counterparties and typically can have two different outcomes: physical delivery or cash settlement.

In a physically deliverable forward contract, one party agrees to buy a commodity on a future date, at a fixed price. The other party agrees to deliver that commodity or asset at the fixed price and date.

In a non-deliverable, cash settled forward contract, the difference between the fixed price in the contract and the settlement value of the underlying commodity is paid in cash from one party to the other.

Unlike forward contracts, which are traded over-the-counter (OTC) directly between two counterparties, futures contracts are standardized and traded on regulated exchanges.

Forwards and futures contracts are used extensively in traditional finance for commodities delivered at discrete times in the future, like corn, and continuously delivered commodities, like electricity, over defined intervals. Popular use cases for these contracts include, but are not limited to:

• Energy and agriculture
• Currencies
• Equities
• Interest rates