What are the advantages and disadvantages of futures compared to forwards?

Expert Solution

Advantages of futures over forwards

No credit Risk involved in future contracts but forward contracts are subject to default risk.
Able to cancel the contract any day before maturity in futures. forward contracts may be difficult to cancel.
These contracts are traded in the exchange.hence easily tradable. forward contracts are traded over the counter.
Large number of traders in futures compared to forward contract.
Future contracts are easily transferable to others. Difficult to transfer in case of forward contracts.
Theses contracts are settled on cash basis.
Secondary market exists in futures while no secondary market in forwards.
Larger number of participants compared to forward contracts.

Disadvantages of futures over forwards.

Don't have any control over future events.
Transaction cost is high in futures while there is no transaction cost in forwards.
Price fluctuations happened in future contracts

jeff jeffy answered 4 months ago

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