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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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