What is the Difference Between Future and Swap?

The main differences between futures and swaps are as follows:

1. Trading venue: Futures are traded on public exchanges, while swaps are traded over-the-counter (OTC) and can be customized to meet specific requirements.
2. Standardization: Futures contracts are standardized, meaning they have a predetermined size, delivery date, and other terms. Swaps, on the other hand, can be tailored to meet the specific needs of the parties involved.
3. Margin requirements: Futures contracts require participants to maintain a margin, which can be subject to margin calls if the margin falls below the required level. Swaps do not have margin calls, as they are based on the creditworthiness of the counterparties involved.
4. Settlement: Futures contracts are settled on a daily basis, with positions marked-to-market and variation margin paid or received accordingly. Swaps, however, do not require daily settlement.
5. Purpose: Swaps are typically used for risk management and hedging purposes, while futures are often used for both hedging and speculation.

In summary, futures are standardized contracts traded on public exchanges, with daily settlement and margin requirements, while swaps are customized contracts traded OTC without margin requirements and are generally used for risk management purposes.

Comparative Table: Future vs Swap

Here is a table comparing the differences between futures and swaps:

Futures are standardized contracts traded on exchanges, where a buyer is obligated to buy and a seller is obligated to sell an asset at a specific price and date. They require a margin to be maintained, which can lead to margin calls if the margin falls below the required level. Positions are settled on a daily basis, reducing liquidity risk but increasing counterparty risk.

Swaps, on the other hand, are customized contracts traded over-the-counter, where two parties agree to exchange cash flows on a specified date or periodically over time. There are no margin calls in swaps, as the position is settled daily. Swaps are typically used for risk management, hedging, and adjusting exposure to interest rate fluctuations.