NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

Futures vs Forwards and Open Interest Explained

Updated 11 October 2026 · Fact-checked

A forward is a private, customised OTC contract with counterparty risk and settlement at maturity. A futures contract is standardised, exchange-traded, margined and guaranteed by the clearing corporation. Open interest is the number of futures contracts still open at a time. Volume is the number traded in a period.

Understand Futures vs Forwards and Open Interest

A forward contract is a private agreement between two parties to buy or sell an asset at a fixed price on a future date. You can fix the quantity, date and price to suit your needs. But each side depends on the other to honour the deal. That is counterparty risk. Forwards are also hard to exit early, because you must find the same counterparty or a new one willing to take over.

A futures contract does the same economic job but on an exchange. The exchange fixes the contract size (lot), expiry date and asset. Only the price is negotiated, through the order book. This standardisation makes the contract easy to trade, so futures are far more liquid than forwards.

The clearing corporation becomes the counterparty to every trade (novation), so you do not face the other trader's default. To protect itself, it collects initial margin and adjusts gains and losses every day through mark-to-market (MTM). Forwards usually have no daily MTM, so losses build up until maturity.

Prices in futures are transparent and visible to all. Forward prices are private. Futures are regulated by SEBI and the exchange. Forwards are largely unregulated bilateral deals.

Open interest (OI) is the total number of outstanding futures contracts that have not been squared off or settled. Each contract has one long and one short, and OI counts the pair once. Volume is the number of contracts traded during a period, usually a day. Volume counts activity. OI counts the positions that remain open. A new trade where both sides open fresh positions raises OI. A trade where both sides close existing positions lowers OI. If one side opens and the other closes, OI does not change.

Key formulas to remember

Forwards vs futures: core contrast: Forward = customised + OTC + counterparty risk + no daily MTM | Futures = standardised + exchange-traded + clearing corporation guarantee + daily MTM and margins; Most MCQs test one of these pairs. Match each feature to the right contract.
Open interest change rule: Both open new → OI rises by 1 | Both close existing → OI falls by 1 | One opens, one closes → OI unchanged; OI counts each long-short pair once, not twice.
Volume vs OI: Volume = contracts traded in a period | OI = contracts outstanding at a point in time; Volume can never fall during a day. OI can rise or fall.

How to solve Futures vs Forwards and Open Interest questions

Use this method for any question comparing forwards and futures or asking about open interest and volume.

1Read the question and decide: is it a comparison, a definition, or a numerical OI/volume question?
2For comparison, identify the feature asked: standardisation, trading venue, liquidity, margin, settlement or default risk.
3Recall the forward feature first (customised, OTC, counterparty risk), then the futures feature (standardised, exchange, guaranteed).
4Check each option for words that swap the two contracts. Reject any option that gives a futures feature to forwards or the reverse.
5For OI numericals, list each trade and note whether each party is opening or closing a position.
6Apply the rule: both open adds 1, both close subtracts 1, mixed leaves OI unchanged. Add volume as one per contract traded.
7Re-read the question to confirm whether it asks for OI or volume, then pick the answer.

Quickest way: Feature-swap check and OI tally

When to use it: Use it when you have under a minute and the options look similar.

Think 'F' words: Forward = Flexible, Face-to-face (OTC), Financial default risk.
Think 'S' words: futures = Standardised, Stock exchange, Safeguarded by margins.
For OI, tag each trade as New-New, Close-Close or Mixed, then add +, − or 0.
Volume is simply the total contracts traded. It is never reduced by closing trades.

Common mistakes in Futures vs Forwards and Open Interest

Saying futures have no counterparty risk at all.
Students over-simplify the clearing guarantee.
Fix: Say counterparty risk is largely removed because the clearing corporation guarantees the trade through novation and margins. Forwards carry direct counterparty risk.
Treating open interest and volume as the same.
Both are counts of contracts, so they sound alike.
Fix: Volume is trading activity in a period. OI is the number of contracts still open. Link volume to a period and OI to a point in time.
Counting OI as twice the number of contracts because there is a buyer and a seller.
Students count both sides of each trade.
Fix: One contract is one long-short pair. Count it once.
Assuming OI rises whenever a trade occurs.
Confusing OI with volume.
Fix: Check whether each side is opening or closing. A mixed trade leaves OI unchanged.
Thinking forwards are standardised and traded on exchanges.
Both contracts fix a future price, so the structures blur.
Fix: Forwards are customised OTC contracts. Standardisation belongs to futures.
Believing futures have no daily settlement of profit or loss.
Mixing up final settlement with daily MTM.
Fix: Futures are marked to market daily. Forwards usually settle only at maturity.

Worked examples

Example 1

Which of the following is a feature of a futures contract but NOT of a forward contract? (a) Customised contract size (b) Daily mark-to-market with margin (c) Bilateral negotiation of terms (d) Direct counterparty default risk

Show the solution

Option (a): customised size belongs to forwards.
Option (c): bilateral negotiation of terms also belongs to forwards.
Option (d): direct counterparty default risk is the main weakness of forwards.
Option (b): daily MTM with margin is a futures feature, run by the clearing corporation.

Answer: (b) Daily mark-to-market with margin

Example 2

On a day, an exchange's opening OI in a stock futures contract is 1,000. Four trades of 100 contracts each occur: (1) buyer and seller both open new positions, (2) both close existing positions, (3) a buyer opens new and a seller closes an existing position, (4) both open new positions. What are the volume and closing OI for the day?

Show the solution

Volume = 4 trades × 100 contracts = 400 contracts.
Trade 1: both open, so OI rises by 100 → 1,100.
Trade 2: both close, so OI falls by 100 → 1,000.
Trade 3: mixed, so OI is unchanged → 1,000.
Trade 4: both open, so OI rises by 100 → 1,100.

Answer: Volume is 400 contracts and closing open interest is 1,100 contracts.

Exam tips

Expect direct 'which is true of futures' questions. Match each feature to forward or futures before you read the options.
Watch for options that give a forward feature to futures. Those are the usual traps.
For OI numericals, write the trade type (new-new, close-close, mixed) beside each trade and then add up.
In NISM-Series-VIII, a wrong answer costs 25% of the marks assigned to the question. Guess only after you have removed at least one clearly wrong option.
Remember the definition wording: OI is outstanding contracts, volume is contracts traded in a period.

Practice questions from Introduction to Forwards and Futures

Futures vs Forwards and Open Interest in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Futures vs Forwards and Open Interest: frequently asked questions

What is the main difference between forwards and futures?

Forwards are customised, private OTC contracts with counterparty risk. Futures are standardised, exchange-traded contracts guaranteed by the clearing corporation, with margins and daily mark-to-market.

What is open interest in futures?

Open interest is the total number of futures contracts that are outstanding, meaning not yet squared off or settled. Each long-short pair counts as one contract.

What is the difference between open interest and volume?

Volume is the number of contracts traded during a period, such as one day. Open interest is the number of contracts still open at a point in time. Volume never decreases within a day, while OI can rise or fall.

Can open interest stay the same when trading happens?

Yes. If one trader opens a new position while the other closes an existing one, volume rises but OI is unchanged.