Future Stocks

The contract of futures is very similar to that to that of term contracts or forwards. However, there exist noticeable differences between them:

The main differences reside in that the contract of futures are standardized in all its terms, while in the term contracts or forwards there exists a liberty to negotiate among all the parts.

The future contracts are more rigid for having to normalize all its terms, and in some cases it can even adjust to the needs of the parts. On the other hand, with the forward the negotiation between parts about the terms of the contract facilitates for them to find an accordance that may adjust itself to their needs, in a way that when different situations appear there will exists a diversity of contracts.

The future contracts are of easy negotiation and more ample than the forward contracts. This is due to that the non-standardization of the contracting elements difficult the anticipated cancellation of the contract when sold. The contract that adjusted itself to very concrete needs for one of the parts will result with complications to find both parts to be in accordance with the same conditions.

The future contracts are negotiated on an organized market, with all the advantages that this implies. For its part, the term or forward contract can go to any market that are as many as agreements of buying and selling exist.

The relation between buyers and sellers of future contracts is anonymous; they don’t know each other. The opposite happens with forward contracts in which the relation between them is usually direct or almost direct, because sometimes a broker will be the intermediary.

In the future the institution in charge of crossing the operations between them assumes contracts, the insolvency risk or non-fulfillment of one of the parts. By its part, in the forward contract the risk of insolvency or non-fulfillment of the parts is assumed by the contracting parts.

In the future contracts the deposit of a margin guarantee is obligatory, this will cover a series of risks, situation that doesn’t happen with the forward contracts.

Also, the future contract requires of a series of daily payments, depending on the evolution of the assets price.

In this way, the future contract is being liquidated on a daily basis to make its value reach zero until the moment of expiration comes in which the price of the contract coincides with the assets price due that the differences have been being liquidated before hand. This way you avoid the higher risk that exists in term contracts respect to the possibility of non-fulfillment of one of the parts as accorded on the date in question.

In the future contracts the liquidation can be done in several ways: physical delivery of the asset, monetary liquidation, anticipated canceling of the position by the selling of the contract, etc.

In the forward contract, the liquidation is obligatory and it is done through the delivery of the asset object of the contract.