Advantages and Disadvantages of Forwards

Forward contract is a non-standardized contract between two parties to buy or sell an asset at a specified time at an agreed price.

The advantages of forward contracts are as follows:

1) They can be matched against the time period of exposure as well as for the cash size of the exposure.

2) Forwards are tailor made and can be written for any amount and term.

3) It offers a complete hedge.

4) Forwards are over-the-counter products.

5) The use of forwards provide price protection.

6) They are easy to understand.

The disadvantages of forward contracts are:

1) It requires tying up capital. There are no intermediate cash flows before settlement.

2) It is subject to default risk.

3) Contracts may be difficult to cancel.

4) There may be difficult to find a counter-party.

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