Advantages and disadvantages of future contracts

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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

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