Concept explainers
To discuss: The difference between spot, forward and future contract.
Explanation of Solution
Spot contract:
Spot contract is a contract in which purchasing and selling of currency, commodity, or security for sudden settlement on the spot date. Which is usually two business days after the transaction date.
Future contract:
Future contract is a standardized contract of buying and selling of underlying asset in a specified price and particular time in future.
Forward contract:
Forward contract is an agreement between parties to buy or sell an underlying asset in future at a specified date, and certain price.
The main differences between spot forward and future contract is as follows:
Spot contract | Forward contract | Future contract |
It is used to merchandise the commodity. | It is used to hedge against the price changes | It is used to hedge against the price changes |
Trades in uneven amounts | Specified amount | Predetermined amount |
There is a sudden settlement | On maturity | On a daily basis |
Immediate contract | Customized contract | Standardized contract |
No need of collateral | Collateral not required | Initial margin needed |
Self-regulated | Self-regulated | Stock exchange |
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