EP FINANCIAL MARKET+INSTITUTION-LRNSMRT
EP FINANCIAL MARKET+INSTITUTION-LRNSMRT
7th Edition
ISBN: 9781264326006
Author: SAUNDERS
Publisher: MCG COURSE
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Chapter 10, Problem 1DYU
Summary Introduction

To discuss: The difference between spot, forward and future contract.

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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 contractForward contractFuture contract
It is used to merchandise the commodity.It is used to hedge against the price changesIt is used to hedge against the price changes
Trades in uneven amountsSpecified amountPredetermined amount
There is a sudden settlementOn maturityOn a daily basis
Immediate contractCustomized contractStandardized contract
No need of collateralCollateral not requiredInitial margin needed
Self-regulatedSelf-regulatedStock exchange

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