Advantages of Forward Contracts – Customization & Hedging

Futures are standardized ($1000 lots). But what if I want to hedge exactly $953.50? I need a Forward.

1. Key Advantages

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2. Comparison: Why Forward > Future for Corporates?

• Scenario: Infosys expects to receive $1,234,567 on 13th Feb.
• Futures: Standard lot is $1,000. Expiry is last Thursday. (Mismatched).
• Forward: Infosys calls CitiBank and books a Forward for exactly $1,234,567 on 13th Feb.
• Result: Perfect Hedge.

3. Exam Notes: Writing the Answer

Question: "Discuss the advantages of Forward Contracts." (5 Marks)

Answering Strategy:

1. Keyword: Customization (Write this first).
2. Privacy: Mention that hedge funds prefer this to keep strategies secret.
3. Delivery: Good for those who actually want the asset (Importers).

Summary

• Bespoke: Forwards are like "Tailored Suits". Futures are "Ready-made Garments".
• Volume: The Forward market (Forex) is actually larger than the Futures market in volume!

Quiz Time! 🎯

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