Forward contract

Every term is negotiable: the quantity, the date, the grade and the settlement mechanics. Because the agreement is bilateral and no clearing house stands between the parties, each carries the other's credit for the life of the contract. Ordinarily no money changes hands at inception, and the price is set precisely so that the contract is worth nothing to either side at the moment it is struck; value accrues to one side and against the other as the market price of the underlying moves away from the agreed price.

The forward price is not a forecast. It is the spot price adjusted for the cost of carrying the asset to the delivery date, and in foreign exchange that carry is the interest rate differential between the two currencies over the period, quoted as forward points added to or taken from spot. The relation holds because a departure from it could be arbitraged with borrowing, a spot transaction and a deposit, so what looks like a market view about a future exchange rate is in fact an arithmetic consequence of two interest rates.

A futures contract expresses the same economic idea through different plumbing: standardised terms, an exchange, daily margining and a clearing house in the middle. A forward is negotiated once and settled once. The most common misreading is to treat forward points as the market's prediction of where the spot rate will stand on the date, which the relation above rules out.