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Forward and futures contracts are not securities but rather trade agreements that enable both buyers and sellers of an underlying physical commodity or financial instrument to lock in eventual price of their traction.

Future contract is a standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy.

Forward contract is a kind of cash market transaction in which a seller agrees to deliver a specific cash commodity to a buyer at some point in the future. The contract maybe contains the underlying, notional amount, delivery price, and the settlement date on which the underlying and the payment will be exchanged, all of which can be set by the demand of the buyer and the seller, no standardized

The difference between future contract and forward contract:

1) Standardize. Futures are distinguished from generic forward contracts in that they contain standardized terms, trade on a formal exchange, are regulated by overseeing agencies, and are guaranteed by clearinghouses.

2) Transaction. Future contracts occurred through a clearing firm, which requires a margin must be settled daily to limit the default risk, and a buyer and a seller don't need to know each other. Forward contracts are cash market transaction usually through OTC market, and the two parties must bear each other's credit risk, which is not the case with a futures contract.

3) Pricing. Both forwards and futures have similar pricing manner. But the forwards, beside the spot price of the underlying, also need to add the cost of carry, like forgone, convenience yield, storage costs and interest or dividend received on the underlying; meanwhile, the price may include a premium for counter-party credit risk as well, because there is no daily marking to market process to minimize default risk. So, if there is no allowance for these credit risks, then the forward price will equal the futures price.

4) Cash flow. As mentioned, futures trade though a clearing house, transactions of futures are cleared everyday to find out the net profit or lose, so futures has a cash flow everyday; but forwards, only be calculated at the date of settlement, so there is no cash flow until that day.

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