Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

A forward contract is indeed privately negotiated and not traded on exchanges, which distinguishes it from a futures contract. This type of contract is customized between two parties, allowing them to agree on specific terms such as the quantity, delivery date, and price of the underlying asset. This customization is possible because forward contracts are typically executed over-the-counter (OTC), meaning they are handled directly between the parties involved rather than through a centralized exchange.

In contrast, futures contracts are standardized agreements that are traded on exchanges. The standardization of futures contracts facilitates liquidity and allows for easy entry and exit from positions, as they have predetermined terms that are set by the exchange. This standardization also means that the counterparty is not known at the outset; it is instead managed by the exchange, which provides a level of protection against the risk of default.

The distinction in trading environments and the nature of how contracts are arranged has significant implications for both the flexibility and the risk profile associated with each type of contract.