A forward contract is a firm agreement between two counterparties to exchange an asset at some future date for an agreed price. It enables the counterparties to lock into a certain price today for a transaction that will occur in the future. The contract specifies inter alia the type and amount of asset to be exchanged, the price at which the exchange will take place (the 'delivery price') and the date of the exchange (the 'delivery date').

A futures contract is also an agreement that enables two counterparties to fix the price at which an asset will be exchanged at a certain time in the future. However, futures contracts are standardized with respect to the specification and amount of the asset to be exchanged and require the exchange to occur on one of a limited number of maturity dates each year (often four). This contract standardization enables futures contracts to be traded on regulated exchanges that provide a clearing house mechanism to ensure that contracts will be honoured.

Forward and future contracts are of major importance in the management of financial and commodity price risk exposure for companies and financial institutions. They offer low-cost and convenient ways of setting up highly-geared positions for speculators seeking bets on movements in financial assets and commodity prices. Institutional investors can use such contracts to alter the allocation of their funds between seven major classes of assets very rapidly and at low cost. Th pricing of forward contracts is based on simple arbitrage relationships. When using futures to hedge risk exposures, great care should be taken to eliminate or reduce mismatches between key characteristics of the futures contract and the risk of being hedged.