Advantages of Futures Contracts in Currency Hedging

Hard Derivative Strategies Futures And Forwards

Marianne is a portfolio manager who uses derivatives to manage currency exposure in her international equity portfolio. She is currently considering using a long forward contract to hedge her exposure to the euro, which she expects to appreciate against the US dollar over the next six months. However, she is also contemplating using a futures contract for its potential liquidity advantages.

With the euro currently trading at 1.10 USD, Marianne's investment strategy is based on her projections about future exchange rates. She decides to analyze the potential impacts of each contract type on her portfolio and evaluates the credit risk, liquidity, and settlement considerations associated with both instruments.

Based on this context, which of the following statements correctly summarizes an advantage of using a futures contract over a forward contract for Marianne's currency hedging strategy?

Futures contracts are specifically designed for hedging activities with no associated margin requirements.

Futures contracts are standardized and traded on exchanges, offering greater liquidity and more accessible market pricing.

Futures contracts eliminate all credit risk compared to forward contracts.

Hint

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