First of all, it must be said that I do not agree with the tutor because he mixed up the contracts. A forward contract is an agreement between two parties for the delivery in the future of the subject of the contract. This agreement is concluded outside the exchange. The forward transaction is firm. That is, it is obligatory for execution. The person who undertakes to deliver the assets takes a short position.
The person acquiring the asset under the contract is in a long position. Since the forward contract is concluded for the purpose of the actual delivery of the asset, it contains conditions convenient for the parties. That is, the contract is not standard. That is why there is practically no secondary market for forward contracts. The price of the asset indicated in the contract is called the delivery price.
A futures contract is an agreement between two parties on the future delivery of the subject of the contract, concluded on the exchange. Futures contract properties:
- It is concluded on the exchange in accordance with the conditions adopted on it. Therefore it is highly liquid.
- It is standard. That is, an investor can easily buy or sell a futures contract and subsequently liquidate his position by reversing the transaction.
- The conclusion of futures transactions is not intended to be a real purchase and sale of an asset but to hedge positions or play on the price difference. Hedging, minimization (offset) of the price risk on a cash position by opening an opposite – urgent or option position on the same product with its subsequent offset. Since the standard terms of the contract are not always acceptable to the parties, only 2-5% of the futures contracts for which the positions remained open end with the actual delivery of the asset.
A person who commits to buy an asset takes a long position, that is, buys a contract. A person who undertakes to deliver an asset takes a short position, that is, sells a futures contract. The basis of a futures contract is a limited range of primary assets, the main feature of which is the unpredictability of price changes. Futures contracts are concluded for assets such as agricultural commodities, natural resources, foreign exchange, securities, and market indices. Thus, the tutor had in mind just futures, not forward contracts.