Currency Hedge: Forward or Futures?

So it is better to hedge currency risk with a futures contract rather than a forward contract since they are “easier to use for frequent adjustments”? Reading 40.

futures- exchange listed, better liquidity, but also you may not get the time frame you want and be forced to roll so up txn costs fwds- less liquid, counterparty risk, but customizable so can create what works for you (no need to roll) my answer would be… depends…

In general I believe fwds are preferred when hedging currencies. Can’t remember where I read it (I think a CFA sample exam), currency forwards are more liquid than currency futures.

dhwit Wrote: ------------------------------------------------------- > In general I believe fwds are preferred when > hedging currencies. Can’t remember where I read > it (I think a CFA sample exam), currency forwards > are more liquid than currency futures. This

really? if anyone has a page #, that’d be great- obviously need a read through this if this is true.

page 302 - reading 40 but the answer is not there… so you have to figure it out… as bpdulog and dhwit said : it seems like forwards are preferable since they are more liquid.

They are only more liquid for currency derivs, right? All others i thought futures were more liquid due to being standardized and exchange traded.

i did not know this. thank you.

markCFAIL Wrote: ------------------------------------------------------- > They are only more liquid for currency derivs, > right? All others i thought futures were more > liquid due to being standardized and exchange > traded. that is my understanding…futures are more liquid than forwards EXCEPT for currency.

Futures or forwards? Depends on how deep your pocket is and the reason behind the hedge. Just because forwards are more liquid does not make them better hedges. It is possible to get a perfect hedge using futures. One more thing… the credit risk using futures is almost negligible. You need to weigh the pros and cons before saying one is better than the other. There is no flat out hard and fast rule about it.

Forwards are more liquid. Futures are easier to change quickly according to Schweser. Never found that word for word in the book. Made absolutely no sense but at this point I think everyone knows the differences between futures and forwards so most questions should be a slam dunk.

Paraguay Wrote: ------------------------------------------------------- > Forwards are more liquid. > > Futures are easier to change quickly according to > Schweser. Never found that word for word in the > book. > > Made absolutely no sense but at this point I think > everyone knows the differences between futures and > forwards so most questions should be a slam dunk. Are you *sure* forwards are more liquid outside of currency markets which require highly customizable contracts?

markCFAIL Wrote: ------------------------------------------------------- > Paraguay Wrote: > -------------------------------------------------- > ----- > > Forwards are more liquid. > > > > Futures are easier to change quickly according > to > > Schweser. Never found that word for word in > the > > book. > > > > Made absolutely no sense but at this point I > think > > everyone knows the differences between futures > and > > forwards so most questions should be a slam > dunk. > > > Are you *sure* forwards are more liquid outside of > currency markets which require highly customizable > contracts? I was just speaking of currencies. This thread was related to currencies. Equity and bond have much greater liquidity in futures.

currency forward has greater liquidity but futures are based on small size , more fixed maturity choice , so it is better to rebalance by currency futures but it is better to use forward to hedge currency risk

Generally I think currency forwards are preferable for hedgers (corporations + international investment managers), and futures are preferable for dealers to hedge their positions as counterparties in the forward markets. My understanding anyway.

Let’s check out what the curriculum said.:slight_smile: “Either futures or forward currency contracts may be used to hedge a portfolio. They differ in several ways. Futures are exchange traded contracts while forwards are over-the-counter (OTC) contracts. Currency forwards are sometimes referred to as currency swaps. Portfolio managers tend to primarily use forward contracts in currency hedging. But forward and futures contracts allow a man- ager to take the same economic position. Therefore, in this reading, the generic term futures will denote both futures and forward (or swap) contracts.” (p. 292)

Confirming evidence.:smiley: In Reading 41, Page 383: "Forward contracts are the preferred vehicle for the risk management of foreign currency. This preference partly reflects the deep LIQUIDITY in the forward market, which has been around longer than the futures market. " – This is why L3 could be so hard.

OK so its forwards for sure. thx Deriv108