Futures and Forward Contracts Compared

What this video covers

• Why standardized terms make futures interchangeable and liquid, while customized terms make forwards illiquid and hard to offset
• How exchange-traded futures have public competitive prices, while over-the-counter (OTC) forwards have private negotiated prices
• Why the clearinghouse eliminates individual counterparty risk for futures, and why forwards carry direct counterparty default risk with no central guarantor
• How daily mark-to-market settlement prevents credit exposure from accumulating in futures, while forwards settle the full gain or loss only at delivery
• Which characteristics the exam writers pair as traps (customized with futures, no counterparty risk with forwards) and how to spot the wrong pairings
• Why the vast majority of futures contracts are offset before delivery, while forwards are typically held to delivery due to lack of a secondary market
• The "factory-made versus handshake" memory aid and how each metaphor maps to exam-testable features