Advantages and disadvantages of future contracts

A brief summary of the main advantages and disadvantages of future contracts

Futures contracts in foreign exchange are different from currency forwards in quite a few ways. The first thing to realise is the a future is completely different to a forward.

A forward is mainly used for hedging currency exposure whereas a future (especially in foreign exchange) is used predominant (nowadays) for speculating.

Here are the main advantages and disadvantages of future contracts versus forward contracts:

Advantages of futures contracts

• Futures contracts have very low margin.
• Futures contracts are on exchange so somewhat reduce counter party risk
• The cost for trading futures are very low compare to currency forwards.

Disadvantages of futures contracts

• Some brokers may insist clients close positions before delivery
• Trade in lots of preset amounts that are inflexible for exact accounting
• Mainly traded on US based exchanges
• Not as flexible for accounting purposes
• Mainly a speculative product
• They trade in large amounts that cannot be partially closed
• You need to be a professional trader to get the full benefits

You may also be interested in these sections:

• Compare currency brokers
• What are currency forwards?
• Currency forward quotes
• FX forward pricing
• Currency forward rates
• Currency forward contract pricing formula
• Forward exchange contract advantages and disadvantages
• Forward exchange contract example
• Forward contract hedge example
• Advantages and disadvantages of future contracts
• Advantages and disadvantages of forward contracts and currency options
• Advantages and disadvantages of option contracts
• Advantages and disadvantages of money market hedge
• Business risks of forward contracts
• Advantages of futures and forwards
• What advantages do futures contracts have over forward contracts
• Currency hedging forward contracts

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