Differentiating forward and future contracts

In the case of the former, all aspects such as the lot size, or the number of units of the underlying asset to be delivered per contract; the grade of the underlying asset, for commodities which are characterised by multiple grades; the location for delivery; and the delivery date are decided by bilateral discussions between the two parties to the contract.

Consequently, the contract may be structured in any way that the two parties deem fit. In futures contracts, however, there is an exchange, which will specify the lot size; one or more deliverable grades and delivery locations; as well as the delivery period. As this suggests, while the exchange in practice does give an element of choice to the two counterparties, they cannot design a contract beyond the boundaries specified by it.

Let us take each of the features of a futures contract. The lot size is set by the exchange, as is the delivery period. In some cases, there is a single delivery date. This is the case for cash settled contracts where there is no question of delivery. For instance, all stock and stock index futures on the NSE expire on the last Thursday of the month.

However in most commodity futures contracts, the exchange will specify a ‘delivery window’.

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