Which of the following is NOT an advantage of using futures contracts to hedge an exposure compared to using forward contracts to hedge the same exposure? A. Futures generally have more liquid markets. B. Futures generally offer lower counter-party risk. C. Futures are available on a greater range of products. D. Futures have very low transaction costs.
Question
Which of the following is NOT an advantage of using futures contracts to hedge an exposure compared to using forward contracts to hedge the same exposure?
A. Futures generally have more liquid markets.
B. Futures generally offer lower counter-party risk.
C. Futures are available on a greater range of products.
D. Futures have very low transaction costs.
Solution
A. Futures generally have more liquid markets - This is an advantage of futures contracts. Futures contracts are traded on exchanges, which typically have more participants and thus more liquidity than the over-the-counter markets where forwards are traded.
B. Futures generally offer lower counter-party risk - This is also an advantage of futures contracts. Futures contracts are cleared through a clearinghouse that guarantees the performance of the contract, reducing counter-party risk.
C. Futures are available on a greater range of products - This is not necessarily true. While futures contracts are available for a wide range of assets, forward contracts can be customized to any asset or exposure, making them potentially available for a wider range of products. So, this is the correct answer.
D. Futures have very low transaction costs - This is an advantage of futures contracts. Because they are traded on exchanges, futures contracts typically have lower transaction costs than forward contracts.
So, the answer is C. Futures are available on a greater range of products.
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