Main characteristics Contracts are directly negotiated between two parties and are customized for the specific needs of the parties Contracts are standardized in terms of commodity, size, prices and contract-terms and traded in organized exchanges. Advantages Basis risk 4 tends to be small because contracts are customized to meet the specific needs of the users. No initial capital is required to participate in the market. Contract terms are negotiable so that they could be longer than those of standardized contracts. Contract can be transferred to another person.
Contracts are fungible.
Prices are fairly transparent. Regulations of Exchanges apply to all transactions. No negotiation is necessary to participate in the market so that anybody can participate with initial deposit. Disadvantages Contract cannot be reversed or transferred to another person. Prices tend to be less transparent because they are negotiated between two parties.