An advantage of a forward contract over a futures contract is that:
A) The forward contract can be used to hedge against future price volatility.
B) The size of the forwards contract is not fixed.
C) Forward contracts can be easily traded on an exchange.
D) Parties to a forward contract can more easily change the agreed upon future price of the underlying asset.
E) None as forward contracts are simply an OTC futures contract.

Question

Quizplus · Accepted Answer

The size of a forward contract is flexible and can be customized according to the needs of the parties involved. In contrast, futures contracts have standardized sizes and specifications. However, option A is incorrect as futures contracts can also be used to hedge against future price volatility. Option C is incorrect as forward contracts are traded over-the-counter, not on an exchange. Option D is also incorrect as once the parties have entered into a forward contract and agreed upon the future price, it cannot be changed. Option E is partially correct as forward contracts are a type of OTC contract but they are not the same as futures contracts.

An Advantage of a Forward Contract Over a Futures Contract