According to CFAI “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.”
I thought futures are preferred since they are exchange-traded, and therefore more liquid. Anyone?
Forward contracts as OTC instrument are more customizable because it may cover each worldwide currency pair, thus are more suited to each counterparty needs. Try to buy FUT on some exotic currency pair, you probably cannot. Furthermore, FUT exposure is more expensive to maintain because is exchange traded based on daily margin.
Counterparty credit risk and liquidity risk is much more on Forward side.
FX Forward market is probably liquid bacause large global corporations and investemnt bank treasuries do transactions in trillion of dollars on this market. It is the highest volume market at all. However, this does not mean that each currency pair is liquid, so spreads are large for some pairs.