Forward contracts vs futures contracts

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Fundamentally, forward and futures contracts have the same function in fixing the price of a commodity for delivery at a future date. Both contracts also serve the same purpose of providing price certainty and reducing risk. However, there are some key differences. 

Futures contracts are exchange-traded and therefore standardised contracts. Forward contracts on the other hand are private agreements between two parties. The private nature of forward contracts also means that they carry a counter-party risk, meaning that there is a chance that a party may default on its side of the agreement. In contrast, futures contracts have clearing houses that guarantee the transactions, removing this counter-party risk. 

In practice, as speculative investment is a significant element of futures trading, few futures contracts make it to expiry, as most are closed prior to maturity. Forward contracts, on the other hand, tend to be used only by hedgers looking to reduce price volatility and delivery of the sale will usually take place.