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Advantages of futures markets compared to forward markets. 1. How do financial futures markets overcome the...

Advantages of futures markets compared to forward markets.

1. How do financial futures markets overcome the liquidity problems associated with forward markets?

2. How do financial futures markets overcome the default risk problems associated with forward markets?

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Answer #1

1) In futures market since contracts are traded on an exchange there are many persons who take a position opposite to one another. Thi sbrings liquidity. Also the exchange provides liquidity i.e. to say, even if there are no opposite positions, the exchange takes an opposite position

2) A future contract traded on an exchange compensates an investor in event of a default thereby removing default risk. This cannot be done in forwards as they aren't traded on an exchange

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