Futures vs Forwards

Before looking at the cash flow of a futures trade, let us remind ourselves of some of the main differences between futures and forwards contracts.

Futures Contracts

Forwards Contracts



Exchange traded

OTC traded

Market and limited credit risk

Market and credit risk

Settlement price fixed on last trading date or monthly average

Settlement at forward price agreed at initial trade date

Futures Contracts

Futures contracts are standardized contracts for the purchase and sale of financial instruments or physical commodities for future delivery on a regulated commodity futures exchange. Futures carry market risk, but credit risk is limited to the exchanges clearing house, minimizing counterparty risk. The daily mark-to-market settlement for all futures contracts ensures all accounts are properly collateralized and daily profits or losses are applied.

Forward Contracts

Forward contracts are customized contracts between two parties to buy or sell assets at a specified price on a future date and are privately negotiated and traded OTC (Over-The-Counter). Forwards carry both credit and market risk, leaving traders open to counterparty default. Settlement happens upon contract expiration, therefore profits or losses may be realized at the point of transaction but the actual cash settlements only occur after the contracts expire.


Initial margin is the value of funds required by CME Clearing to initiate a futures position. While CME Clearing sets the margin amount, your broker may be required to collect additional funds for deposit.

As the value of the November position changes and is mark--to-market against the CME settlement curve, the trader may need to pay maintenance margin.

Maintenance margin is the minimum value that must be maintained at any given time in the futures clearing account.

If the funds in trader’s clearing account drops below the maintenance margin level:

  • A margin call will be issued to pay funds immediately to bring the account back up to the initial margin level.
  • A margin call cannot be met at the position is reduced in accordance with the value of funds remaining in your account.
  • The position may be liquidated automatically once it drops below the maintenance margin level.


On July 1, if a trader opens a long COMEX Copper position for November they pay initial margin to their clearing broker or futures clearing merchant (FCM).

In this example, assume the trader pays $2,400 initial margin per lot to open the long HG COMEX Copper futures November contract on July 1 @ $2.6.

On August 1, the November position is valued at 2.8 and by closing the long position, the P&L is (2.8-2.6) x 25,000 = +$5,000.

Trader’s Account



Account Balance


Starting Balance



Long 1 HG @ 2.60/lb
(initial margin $2,400)



Short 1 HG @ 2.80/lb

$5,000 + $2,400


Ending Balance


$2.80 - $2.60 = $0.20

$0.20 x 25,000lbs = $5,000 Profit

P&L ($5,000) + margin ($2,400) = $7,400

As the trader opened and closed futures positions, their P&L is realized daily. Meaning cash is either credited or debited from a trader’s account each day based on the price movement for that day.

If, however the trader opened and closed forward contracts, there is a difference between the realization of Profit or Loss, and having the actual cash in your account.

For example, a long forward contract could be opened on July 1st for the delivery month of November, and then closed on August 1st. At this point P&L is realized, but it would not settle until the November contracts had expired.

This means even the P&L of the closed positions are only available after settlement of the contracts and would have resulted in 4 months of waiting for the profit earned for this trade.

Test your knowledge


In case you didn’t know, the CFA Institute allows its members to self-determine and report continuing education credits earned from external sources. CFA Institute members are encouraged to self-document such credits in their online CE tracker. CME Institute offers a variety of courses, webinars, and white papers to support your professional education.

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