What are the practical differences between futures and forwards beyond 'exchange-traded vs OTC'?

You're right that the exchange-vs-OTC distinction is just the surface. The real differences that matter for CFA Level II revolve around daily settlement, credit risk, and pricing divergence.

Daily Settlement (Mark-to-Market): Futures contracts settle gains and losses every day through a margin account. If you're long a gold future at $2,000 and gold closes at$2,015, you receive $15 that same day. This daily cash flow creates a compounding effect that can cause futures prices to differ from forward prices on the same underlying.

Loading diagram...

When Futures and Forwards Prices Diverge: The key relationship: if the underlying asset price is positively correlated with interest rates, futures prices exceed forward prices. Why? When rates rise, your long futures position benefits from daily settlement — you receive cash that can be reinvested at the now-higher rate. This is the convexity adjustment.

For most equity and commodity contracts, the difference is small. For interest rate derivatives (Eurodollar futures, SOFR futures), the convexity adjustment matters significantly.

Credit Risk:

• Futures: Near-zero counterparty risk due to the clearinghouse acting as central counterparty, daily margin calls, and initial margin requirements.
• Forwards: Bilateral credit risk. If your counterparty defaults near maturity when the contract has significant value, you bear the loss. This is why forward users often require collateral agreements (CSAs).

Practical Choice Factors:

A corporate treasurer hedging a specific foreign currency receipt in 73 days would prefer a forward (exact amount, exact date). A speculator wanting liquid exposure to oil prices would choose futures.

For more on derivative instrument selection, explore our CFA Level II Derivatives course.