What is the difference between using futures or options and forward contracts to hedge?
There are several differences between using futures or options and forward contracts to hedge. Futures and option contacts are exchange-traded. Two separate bodies regulate exchange-traded products: the exchange itself and the Commodity Futures Trading Commission (CFTC). This limits the credit risk of entering into a forward contract. Futures and options contracts also tend to be more liquid than forward contracts. It is generally easier to execute a trade in the futures and options markets than find another entity with whom to negotiate a forward contract. Forward contracts are customizable. Whereas futures and options have contract specifications, a forward contract’s size and time constraints can be negotiated between private parties.
