ADVANTAGES OF FUTURE AND FORWARD CONTRACT

Q.4: Explain the advantages of forward and future contracts.                                          OR

Explain the importance of financial derivative contracts.

Ans. A. ADVANTAGES OF FORWARD AND FUTURE CONTRACTS :-

1)        Protection Against Price Fluctuations :-

Parties to contract can protect themselves against the risk of heavy fluctuations in price of underlying assets.

2)        Flexibility :-

Parties to forward contract can modify the agreement as per their convenience.

3)        Facilitates Planning:-

These contracts facilitates planning to buy / sell assets at the time when they are most required.

4)        Bulk Transactions :-

The forward / future contracts facilitates bulk purchase or sale of assets at short notice in advance of delivery.

5)        Portfolio Management :-

Portfolio managers can advice their clients for future contracts to avoid heavy fluctuations in prices.

6)        Development Of Financial Market :-

Future and forward contracts facilitates the growth and development of financial markets - Capital Markets as well as Money Markets.

7)        Cash Management :-

In forward contract payment is done at maturity on delivery of asset. In future contract only margin money is to be paid. So these contracts do not require payment of purchase price at the time of contract.