Mortgage consultant

The key difference between futures and forwards is that the former are contracts intermediated through an exchange while the latter are agreements made directly between individual parties. Futures contracts are always standardized. Futures exchange operations are designed to eliminate direct counterparty risk. They do so by requiring all exchange members to contribute to an “insurance” fund that pays out in the event of the failure of a member. In addition those holders of futures contracts that have a paper loss are required to make a cash or security deposit equal to the net sum of their losses on all contracts with the exchange on a regular basis, usually at the end of the business day. Most forward contracts are also highly standardized but usually allow for more flexibility than futures contracts. Parties are also exposed to counterparty default risk.
Many people fail to recognize that although most of their day-to-day transactions are carried out through spot markets their most important transactions are actually in the form of forwards. An itinerant Mexican farm-worker in California is far more aware of the difference between the spot and forward markets for labor than the average salaried white-collar professional. Mortgages are a form of multiple-period forward rate agreement where the borrower is either a fixed or floating rate payer.