Question

Why use a forwards contract rather than a futures contract?

Answer 1

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   A forward contract is a customized contractual agreement where two private parties agree to trade a particular asset with each other at an agreed specific price and time in the future. Forward contracts are traded privately over the counter, not on an exchange.

A futures contract — often referred to as futures — is a standardized version of a forward contract that is publicly traded on a futures exchanges. Like a forward contract, a futures contract includes an agreed upon price and time in the future to buy or sell an asset — usually Stocks Bonds, or commodities, like gold.

The main differentiating feature between futures and forward contracts — that futures are publicly traded on an exchange while forwards are privately traded — results in several operational differences between them. This comparison examines differences like counter party risk, daily centralized clearing and mark to market, price transparency, and efficiency.

Comparison chart

Forward Contract versus Futures Contract comparison chart
	Forward Contract	Futures Contract
Definition	A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time at a specified price.	A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price.
Structure & Purpose	Customized to customer needs. Usually no initial payment required. Usually used for hedging.	Standardized. Initial margin payment required. Usually used for speculation.
Transaction method	Negotiated directly by the buyer and seller	Quoted and traded on the Exchange
Market regulation	Not regulated	Government regulated market (the Commodity Futures Trading Commission or CFTC is the governing body)
Institutional guarantee	The contracting parties	Clearing House
Risk	High counter party risk	Low counter party risk
Guarantees	No guarantee of settlement until the date of maturity only the forward price, based on the spot price of the underlying asset is paid	Both parties must deposit an initial guarantee (margin). The value of the operation is marked to market rates with daily settlement of profits and losses.
Contract Maturity	Forward contracts generally mature by delivering the commodity.	Future contracts may not necessarily mature by delivery of commodity.
Expiry date	Depending on the transaction	Standardized
Method of pre-termination	Opposite contract with same or different counter party. Counter party risk remains while terminating with different counter party.	Opposite contract on the exchange.
Contract size	Depending on the transaction and the requirements of the contracting parties.	Standardized
Market	Primary & Secondary	Primary

that's why forward contract use rather than a futures contract.