How are forwards different from futures?

Forwards are indeed custom-made contracts that are negotiated directly between two parties, allowing them to tailor the terms of the contract to their specific needs. This customization includes factors such as the contract size, maturity date, and the specific underlying asset. As a result, forwards are not traded freely on an exchange and are typically settled at the end of the contract term, which introduces counterparty risk, as there is no clearinghouse involved to guarantee the transaction.

In contrast, futures are standardized contracts traded on exchanges, where the terms, such as quantity and delivery dates, are set by the exchange. This standardization allows for greater liquidity and the ability to easily enter and exit positions for traders.

Understanding these differences is crucial for recognizing how the two instruments function within financial markets and how they might fit different trading strategies or risk management practices.