Futures and forwards: what are they and how do they compare?

Futures vs forwards: what’s the difference?

Futures and forwards are financial instruments that can cater to different needs and market conditions. Whether you’re speculating or hedging risk, you’ll use leveraged derivatives to trade these contracts as underlying instruments with us.

While futures and forwards are essentially one and the same in the way we offer them, there are some fine distinctions between the two when looking at them specifically in their pure form (which our products are derived from). Because of this, trades of pure-form futures and forwards – even on the same asset – can function distinctly.

Below are some of the key differences in features between underlying futures and forwards, which our products are derived from.

* We generally offer potential expiration dates that you can choose from when trading forwards with us using derivatives.
** When trading on our platform, counterparty risk is limited based on the terms and agreements that govern our relationship with you.

Our futures and forwards offerings

You’ll trade a futures or forward contract as the underlying of a spread bet or contract for difference (CFD) with us. Spread bets and CFDs are financial derivatives that enable you to trade using leverage. So, you’ll pay only a deposit (called margin) to open a position and get full exposure.

With leverage, both potential profits and possible losses will be magnified to the full value of the trade. It’s important to manage your risk as you could lose money quickly – you could even lose more than the deposit you paid to open the position.

Futures and forwards: our offering vs pure form

We don’t offer futures and forwards markets in their pure form. The main ways in which our futures and forwards offerings differ are that you’ll only trade on the price movement, and that they’re marked to market 24/7 in continuous time, during applicable market hours (rather than daily or at the end of the contract).

Properties that our futures and forwards offerings have in common with their pure-form counterparts include generally being cash-settled (many futures and forwards are cash-settled in the underlying) and carrying counterparty risk.* When trading on our platform, counterparty risk is limited based on the stipulations outlined in the terms and agreements that govern our relationship with you.

* Some forwards such as FX can be physically settled in the underlying, eg you receive the physical currency.

Futures and forwards: definitions

Pure-form futures and forwards can be described as follows:

Futures and forwards prices vs spot prices

Compared to trading a futures or forward contract as the underlying of a derivative like a spread bet or CFD, trading the spot market – which has tighter spreads – is typically more suited for short-term trading (eg day trading).

Spot (cash) prices enable you take a position on the current market price of an underlying asset like shares, exchange traded funds (ETFs), indices and forex. With spot trading, you’ll pay overnight funding charges if you keep your position open from one trading session into the next – to avoid these fees, you can open and close your positions within the same trading day.

With futures and forwards trading – which is generally more suitable for longer term trading – you won’t pay overnight charges as this cost is already accounted for in pricing for the duration of your contract; but the spread is typically wider compared to spot trading.

Futures and forwards markets vs spot markets

You can get exposure to a wide range of futures, forwards, and spot markets as the underlying instrument of a spread bet or CFD on our platform. Whichever you choose, you can go long or short based on your market assumption.

Below are the spread bet markets you can take a position on via spot trading, and our futures or forwards offerings.

Futures vs forwards examples

The below are examples of trading futures and forwards – the first is a CFD futures contract example, and the second, a forward contract example in the underlying. While they outline speculation only and hedging, respectively, you could also do it the other way around; whether you trade with us or in the underlying, both futures and forwards can be used for speculation or hedging.

Futures example in commodity trading: oil

A trader buys an oil CFD futures contracts that’s expiring in 6 months at a price of $50 per barrel. At the expiration date, the price of oil is $60. 1 standard contract = $10 per point

Profit or loss in a CFD account = (number of contracts x value per contract) x (closing price - opening price)

That means the trader in this example would make a profit of:

(1 x $10) x ($60 - $50) = $100

Had the price fallen instead, the trader would’ve incurred a loss because the market would’ve moved against the position.

If the trader chose to trade in a spread betting account instead, the profit or loss would be calculated as follows:

Bet size per point x (closing price - opening price)

Forward contract example in commodity trading: oil

A manufacturing company wants hedge the risk of rising oil prices between now and a specific date in 3 months. As the date is different to the fixed futures expiry, the company choses to trade a forward, which enables customisation (in the underlying). This way, it can choose an expiry to match the date it wants to buy the oil on.

The company pays $50 per barrel for the forward contract, and the price of oil rises to $60 at expiry. The higher cost will be offset by the hedge on the forward contract.

The payoff of a forward contract long position (in the underlying) = spot price at expiry - the agreed-upon delivery price

The payoff of a forward contract short position (in the underlying) = agreed-upon delivery price - spot price at expiry

That means the trader in this example would make a profit of:

$60 - $50 = $10 per barrel

Had the price fallen instead, the company would’ve incurred a loss on the trade as they would’ve had to pay more than the spot price at expiry.

If the company chose the futures contract (in the underlying) with the fixed expiry instead, the profit or loss would’ve been depended on the spot price at contract expiration.

Is trading futures or forwards better for me?

When considering which could be better for you between futures or forwards, it’s worth looking at how these instruments work in pure form versus as an underlying of a financial derivative with a broker (like us). While there are some fundamental differences between futures and forwards in their pure form, the two are practically the same when traded with us as underlying instruments of financial derivatives.

Additionally, when engaging in any trading activity, it’s important to consider your unique trading needs, objectives, and risk tolerance.

Here’s how futures and forwards measure up against each other in some respects that may be of interest:

Price
On our platform, a futures contract’s value is based on the listed asset’s price on the underlying exchange, including our spread. For forwards, we create prices synthetically, considering the asset being traded, the contract’s time to expiry, and prevailing interest rates.

Counterparty risk
Forwards inherently carry higher counterparty risk as there’s no centralised exchange to guarantee the trade. The contract might not be honoured by the counterparty (your broker), despite the obligation to fulfil their end of the agreement. When trading on our platform, this risk is limited based on the terms and agreements that underpin the contracts and transactions that you enter into with us.

Regardless of the kind of financial instrument you choose, these terms and agreements are supported by applicable regulations as well as our policies and procedures that cover aspects such as protecting and segregating client funds and assets.

Marking to market
Futures are typically marked to market daily, meaning the value of the contract is adjusted to reflect the underlying’s market price at the end of each trading day. This feature provides a degree of transparency through the regular measuring of fair value. With us, futures and forwards are marked to market in real time based on price movements of the underlying asset.

How to trade futures and forwards

1. Learn about futures and forwards
2. Log in or create a spread betting or CFD trading account and fund your account
3. Select the futures or forwards market you want to trade on, and take steps to manage your risk
4. Place your deal and monitor your position
5. Close your position

Remember that with us, you don’t trade futures or forwards outright. Instead, you’ll trade them using spread bets or CFDs. Remember, these financial derivatives involve significant risk and complexity due to the use of leverage. You’ll open a position using a deposit – a percentage of the full trade value – but both potential profits and possible losses are calculated based on the value of the position’s total exposure.

This means that you can lose money rapidly; you can even lose more than the initial deposit you paid to enter the trade. It’s important to understand all risks involved and ensure they align with your trading goals and risk tolerance.

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