Pros and Cons of using Futures contracts over forwards when hedging FX exposure - Advantages and disadvantages table in Other Accounting

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Created by: MattS1991
Created on: 17-02-19 18:37

Pros and Cons of using Futures contracts over forwards when hedging FX exposure

Advantages

Transaction Costs of futures should be lower and they can be traded.
The exact date of receipt or payment of the foreign currency does not need to be known because the futures contract does not have to be closed out until the transaction takes place.

Disadvantages

The contracts cannot be tailored.
Having standard contract sized and basis causes Hedge inefficiencies.
Only a limited number of currencies are available with futures contracts.
The procedure for converting currencies (neither of which is the $) is more complex with futures than with forwards.

Evaluation

Transaction costs are lower, and Futures are better when you are not exactly sure when the receipt or payment will take place. However, they are not flexible and this can result in hedge inefficiencies. They are also not available in all currencies.

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