Question

1. Explain why an investor might take an illiquid position in a forward contract rather than using an exchange-traded futures contract. (2 pts.)

Answer 1

an investor will be taking an illiquid position in a forward contract rather than using a exchange traded future contract because-

A. Forward contracts are having lower fees as in comparison to the future contracts.

B. Future contracts are standardized in nature and forward contracts are customized in nature and forward contracts can be modified according to the needs of the various parties so, it will help to customise the contract according to the needs of the individuals

C. This contracts are not traded hence there is a element of secrecy also.

D.forward contracts can also offer a complete hedge, and it can be matched against the time period of exposure as well as for the cash size of exposure.