Analysis of Asset Allocation

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FUTURES : Forward and Futures contracts
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Difference between Forward and Futures contracts.

The mechanisms of are forward contract is the same as the ones of a futures contract. The only difference is that the forward contract is not traded on an exchange. A forward contract is a direct agreement between two investors. A forward contract is more flexible than the futures contract because the two parties can agree on all the characteristics of the contract (underlying amount, delivery date, delivery place, ....) but these contracts are more difficult to close in advance (because you have to negotiate with your original counterpart who may not want to close the position) and are therefore less liquid. Follow up of credit risks is also more difficult. As they are not traded on an exchange, these contracts are known as OTC (over the counter).

Due to the above, forward contract are usually reserved to institutional investors and large corporate.

Most popular forward contracts.

The most popular forward contracts are contract on currencies foreign exchange and interest rates (FRA).

 In the next section, we will concentrate on futures and forward prices.

 


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