Question

A futures contract is more flexible and liquid than a forward contract. Explain why.

Answer 1

Futures contract are traded on exchanges and they require margin (and thus secure from default) thus lowering the counterparty default risk. Also, as they are traded on exchange, settlement terms- quality of delivery, delivery date, mode of settlement are all standardized hence the traders have very low uncertainty. This gives them higher confidence to trade in futures compared to forwards which are customized, and dont require margin and the quality of underlying delivered can be very different. Due to higher confidence and many people wanting same type of contracts, the futures contract is more flexible and liquid.