Pros And Cons Of Forwards Vs Futures

Question 1

Pros of using forwards over futures

Answer 1

Customisation: forward contracts are tailored to the specific needs of the company

Flexibility in settlement: companies can negotiate physical delivery of the currency depending on their needs

OTC accessibility: forwards are traded over the counter making them accessible even in currencies or markets not covered by standard futures contracts

Question 2

Cons of using forwards over futures

Answer 2

Credit risk: forwards carry counterparty risk because they are OTC contracts

Limited liquidity: forward contracts are less liquid compared to futures making it harder to exit positions

Higher transaction costs: due to customisation forwards might involve higher transaction costs compared to futures