Quick: someone give me three differences between forwards and futures and three reasons why forwards are preferred vehicle for risk management of a foreign currency.
futures: standardized exchange traded marking-to-market on a daily basis forwards are used for flexibility (especially flexibility in time horizon as currency futures typically expire 4 times a year March, June, Sept, December -> basis risk is high if a transaction is in late October).
Nice work: Futures: Standardized contract (Forward is customizable) Guaranteed by clearinghouse against default (Forward is subject to default of other party) Futures require margin deposits w/daily settlement (Forwards pay full value at exp) Futures regulated, forwards are not Why forward preferred? More exact hedge, customizable, more liquidity in currency market, don’t require margin deposits, and is a private transaction