Forwards versus futures: the six-attribute table
◈ 7 cardsA forward is private, customised and settled at expiry; a future is exchange-traded, standardised, cleared, margined, marked to market daily and usually offset — six attributes and the daily mark.
The forward — a private promise
Halton Dairy Co-op must pay a US supplier US$500,000 in ninety days. If the Canadian dollar weakens, the bill grows. Halton calls its bank and enters a forward contract: the bank will sell it US$500,000 in ninety days at 1.3620 CAD per USD. Notice five things. The amount and the date were chosen to fit Halton's invoice — the contract is customised. It is a private agreement between Halton and the bank — nobody else knows its terms. No cash changes hands today; the whole exchange happens at expiry. Halton is now exposed to the bank's ability to perform in ninety days — counterparty risk — and the bank to Halton's. And if Halton's invoice is cancelled, it cannot simply sell the forward to someone else; it must negotiate its way out with the bank. That is a forward: an over-the-counter (OTC) contract, tailored, illiquid, settled once.
The future — the same promise, standardised
A fund wants gold exposure. It buys one gold futures contract on an exchange at 2,650 per ounce. The contract is standardised: 100 troy ounces, a fixed delivery month, a fixed grade — the fund could not ask for 137 ounces or a Tuesday delivery. Because every contract is identical, they trade in a liquid market at one public price. The fund never deals with the trader who sold; the clearinghouse (in Canada, CDCC) steps between every buyer and seller and becomes the counterparty to both, which removes counterparty risk. To hold the position the fund posts a performance bond (futures margin) — a good-faith deposit, not a loan, so no interest is charged on it. And the position is marked to market every day.
Daily mark-to-market — the worked example
The fund bought at 2,650. At the first daily settlement gold is 2,662:
=(2662-2650)*100 = +$1,200 credited to the margin account.
The next settlement is 2,640:
=(2640-2662)*100 = −$2,200 debited.
Each day the gain or loss since yesterday's settlement is paid in cash — the contract is effectively re-struck at the new price every evening. A forward pays nothing until expiry; a future pays every day. If the margin account falls below the maintenance level the fund receives a margin call and must top it up, or the position is closed. Most futures positions never reach delivery: the fund offsets — sells an identical contract — and the clearinghouse nets the two to zero.
The six attributes
| Forward | Future | |
|---|---|---|
| Venue | OTC — private, with a dealer | exchange (MX) |
| Terms | customised amount and date | standardised size, grade, month |
| Counterparty | the other party — counterparty risk | the clearinghouse (CDCC) |
| Settlement | once, at expiry | daily mark-to-market |
| Margin | usually none | performance bond, maintenance level |
| Exit | negotiate with the counterparty | offsetting trade any day |
The MX's futures include the S&P/TSX 60 index future and CORRA futures on Canada's overnight rate. Older material names the BAX, a bankers'-acceptance future on CDOR; CDOR ceased publication on 28 June 2024 and the CORRA future is the live short-term rate contract.
Recompute
A third settlement at 2,655: =(2655-2640)*100 = +$1,500. Three days net: 1,200 − 2,200 + 1,500 = +500 — exactly (2,655 − 2,650) × 100. The daily marks always sum to the total move. Cold, the six rows: venue, terms, counterparty, settlement, margin, exit.