Financial Markets for Commodities

3 Futures Contracts and Forward Contracts

A futures contract is a commitment to buy or sell an underlying asset at a certain price, at a future date. The term “underlying asset” is used in a generic sense: contracts may involve both commodities as well as financial securities, or again, other underlying assets such as temperatures or precipitation (in the case of climatic derivatives). Any commitment to sell (or buy) involves, on the part of a counterparty, a reciprocal and irrevocable commitment to buy (or to sell). Futures markets are organized markets, where futures contracts are negotiated. Forward contracts are contracts concluded over the counter (OTC), which reciprocally engage a buyer and a seller to carry out a physical operation at a later date. The price, the quality and the quantities are fixed at the time that the contract is drawn up.

Futures and forwards share certain similarities but differ on essential points. In both cases, there is a commitment for execution at a later date. However, three differences must be highlighted:

• – futures are contracts where a clearing house (CH) serves as an intermediary and guarantee between contracting parties, while forwards are over the counter contracts;
• – apart from exceptional cases, forwards end in a physical delivery, while the majority of futures do not lead to a delivery of the underlying asset;
• – the temporal flow profiles are different for both instruments.

It must also be highlighted that futures contracts are generally ...