Futures and forwards: what are they and how do they compare?

Futures vs forwards: what’s the difference?

Futures and forwards are financial instruments that can cater to different needs and market conditions. With us, you can trade listed futures, or over-the-counter futures or forwards using spread bets and CFDs.

While similar, a futures contract shouldn’t be confused with a forward contract. Both agreements give you the obligation to buy or sell an asset at a set price in the future, but there are a few differences between them. Futures are standardised, non-negotiable contracts traded on exchange, and forwards contracts are non-standardised, negotiable contracts traded over the counter.

Below are some of the key differences in features between listed futures and OTC futures and forwards

You can trade listed futures straight from My IG using our US options and futures platform from our colleagues at tastytrade.

* We generally offer potential expiration dates that you can choose from when trading forwards with us.
** When trading with us, counterparty risk is limited based on the terms and agreements that govern our relationship with you.

Our futures and forwards offerings

You can trade listed futures with us using a US options and futures account. This gives you access to micro or major futures in their pure form, on a wide range of markets. You can trade futures on stocks, ETFs and futures options. All this, on an award-winning platform,² with low commissions, and fantastic trading content from our colleagues at tastylive.

You can also trade a futures or forward contract as the underlying of a spread bet, or a futures contract as the underlying of a contract for difference (CFD) with us. Spread bets and CFDs are financial derivatives that enable you to trade using leverage.¹

Compare our trading accounts

Trading futures with leverage

Whether you choose to trade futures and forwards over the counter or go for our listed futures offering, you’ll pay only a deposit (called margin or buying power) to open a position and get full exposure. The use of leverage comes with increased risk and complexity as both potential profits and possible losses are magnified to the full value of the trade. It’s important to manage your risk as you could lose money quickly – you could even lose more than the deposit you paid to open the position.¹

Futures settlement

Listed futures are either physically delivered or financially settled. But here's the thing – hardly anyone actually ends up with a truckload of corn or barrels of oil. Why? Because most traders close their contracts before they expire.

For futures where you could get actual delivery, there's something called a 'first notice date'. To keep you from accidentally ending up with a warehouse full of things, we’ll let you know a few days before this date. You need to either sell your contract or roll it over to a later date.

First notice applies to futures on agriculture, metals and interest rates. Those three plus currencies and energies can be physically delivered (but not the smaller E-mini contracts).

OTC futures and forwards are generally cash settled. Some forwards, like FX, can be physically settled. This means you’ll get the physical currency when trading using spread bets.

Futures and forwards: definitions

Listed futures and OTC futures and forwards can be described as follows:

Futures and forwards prices vs spot prices

Compared to trading a futures or forward contract, trading the spot market – which generally has tighter spreads – is typically preferred by short-term traders (eg day traders). However, some equity index futures also have narrow spreads. A spread is the difference between the bid and ask prices that varies depending on market conditions.

You can use our OTC products to trade a wide range of spot (or ‘cash’) markets. Spot prices enable you take a position on the current market price of an underlying asset like shares, exchange traded funds (ETFs), indices and forex. With spot trading, you’ll pay overnight funding charges if you keep your position open from one trading session into the next – to avoid these fees, you can open and close your positions within the same trading day.

With futures and forwards trading – which is generally more suitable for longer term trading – you won’t pay overnight charges as this cost is already accounted for in pricing for the duration of your contract; but the spread is typically wider (compared to spot trading).

Learn more about the differences between futures prices and spot prices

OTC futures and forwards markets vs spot markets

You can get exposure to a wide range of OTC futures, forwards, and spot markets as the underlying instrument of a spread bet or CFD on our platform. Whichever you choose, you can go long or short based on your market assumption.

Below are the spread bet markets you can take a position on via spot trading, and our OTC futures or forwards offerings.

Futures vs forwards examples

The below are examples of trading OTC futures, forwards and listed futures. Whether you trade over the counter or in the underlying, futures and forwards can be used for speculation or hedging.

Listed futures example in commodities trading: corn

Let's say you buy one corn futures contract expiring in six months at a price of $5.50 per bushel. At the expiration date, the price of corn is $6.00 per bushel. One standard CBOT corn futures contract represents 5,000 bushels of corn.

Profit or loss (P/L) in a futures account = (number of contracts x contract size) x (closing price - opening price)

That means you’d make a profit of:
(1 x 5,000 bushels) x ($6.00 - $5.50) = $2,500

Had the price fallen instead, you would've incurred a loss (of the same amount) because the market would've moved against the position.

Remember, this is a standardised exchange-traded futures contract, not a spread bet or CFD. The contract size is fixed (5,000 bushels for corn), unlike OTC trades where the value per point can vary.

OTC futures example in commodity trading: oil

A trader buys an oil CFD futures contracts that’s expiring in 6 months at a price of $50 per barrel. At the expiration date, the price of oil is $60. 1 standard contract = $10 per point

P/L in a CFD account = (number of contracts x value per contract) x (closing price - opening price)

That means the trader in this example would make a profit of:

(1 x $10) x ($60 - $50) = $100

Had the price fallen instead, you would’ve incurred a loss (of the same amount) because the market would’ve moved against the position.

If you chose to trade in a spread betting account instead, the P/L would be calculated as follows:

Bet size per point x (closing price - opening price)

Forward contract example in commodity trading: oil

A manufacturing company wants hedge the risk of rising oil prices between now and a specific date in 3 months. As the date is different to the fixed futures expiry, the company choses to trade a forward, which enables customisation (in the underlying). This way, it can choose an expiry to match the date it wants to buy the oil on.

The company pays $50 per barrel for the forward contract, and the price of oil rises to $60 at expiry. The higher cost will be offset by the hedge on the forward contract.

The payoff of a forward contract long position (in the underlying) = spot price at expiry - the agreed-upon delivery price

The payoff of a forward contract short position (in the underlying) = agreed-upon delivery price - spot price at expiry

That means the trader in this example would make a profit of:

$60 - $50 = $10 per barrel

Had the price fallen instead, the company would’ve incurred a loss (of the same amount) on the trade as they would’ve had to pay more than the spot price at expiry.

If the company chose the futures contract (in the underlying) with the fixed expiry instead, the profit or loss would’ve been depended on the spot price at contract expiration.

Listed futures example

Say you’re bullish on gold and you take a long position on the precious metal at $1,700 using one contract. The contract size of a gold futures is 100 troy ounces.. You close the position before it expires, at which point the price of gold is at $1,750.

You’d pay $1,700 instead of $1,750, $50 less than the new market price.

To calculate a listed futures contract’s profit or loss, divide the profit per contract ($1,750 - $1,700 = $50) by the tick size (0.10 for gold futures) to get the total tick movement. Then, multiply this by the tick value ($10 for gold futures) to find the total profit or loss. In this case, the profit is $5,000.

For a contract size bigger than 1, you’d multiply this figure with the number of contracts to determine your P/L.

If you closed the position when the price of gold was $1,650, you would’ve lost $5,000 instead.

Is trading OTC futures and forwards or listed futures better for me?

When considering which could be better for you between OTC futures or forwards and listed futures, it’s worth looking at the fundamental OTC versus listed product differences.

Additionally, when engaging in any trading activity, it’s important to consider your unique trading needs, objectives, and risk tolerance.

Here’s how OTC futures and forwards measure up against to listed futures in some respects that may be of interest:

Price
The value of an OTC futures contract is based on the listed asset’s price on the underlying exchange. For forwards, we create prices synthetically, considering the asset being traded, the contract’s time to expiry, and prevailing interest rates. You’ll pay no commission when trading these with us, just our spread.

Listed futures are priced according to the spot value of their underlying market – forces of supply and demand are the main driver of these price moves. We charge a commission to execute a listed futures trade. Listed futures trades will also incur a per-contract exchange, clearing and regulatory fee.

Find out more about our charges

Counterparty risk
OTC products inherently carry higher counterparty risk as there’s no centralised exchange to guarantee the trade. The contract might not be honoured by the counterparty (your broker), despite the obligation to fulfil their end of the agreement. When trading on our platform, this risk is limited based on the terms and agreements that underpin the contracts and transactions that you enter into with us.

Regardless of the kind of product or financial instrument you choose, these terms and agreements are supported by applicable regulations as well as our policies and procedures that cover aspects such as protecting and segregating client funds and assets.

Marking to market
Listed futures are marked to market daily, meaning the value of the contract is adjusted to reflect the underlying’s settlement price at the end of each trading day. This feature provides a degree of transparency through the regular measuring of fair value. With us, OTC futures and forwards are marked to market in real time based on price movements of the underlying asset.

How to trade futures and forwards

1. Learn about listed futures, and OTC futures and forwards Log in or create the type of account you want and fund it
2. Select the market you want to trade on, and take steps to manage your risk
3. Place your deal and monitor your position
4. Close your position

Remember, these financial derivatives involve significant risk and complexity due to the use of leverage. You'll post an overnight requirement to open a position – a percentage of the contract's notional value. .

Due to the size of a futures contract, you can lose more than the overnight requirement you put down when entering the trade.. It’s important to understand all risks involved and ensure they align with your trading goals and risk tolerance.¹

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