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Advantages and Disadvantages for Contracting Futures
Advantages: The future markets can be used as instruments to cover the risks derived from the fluctuations of cash prices before expiration.
The futures contracts present less initial costs than other similar instruments, due that you only have to deposit guarantee or margin an underlying asset of greater value.
The existence of an organized stock market and of standardized contracting terms gives liquidity and offers to the participants the possibility of closing positions on a date before the expiration.
The participant’s parts on the contract don’t assume any risk of insolvency; the clearinghouse guarantees the liquidation of the contract.
Disadvantages: In a similar way as to what happens in the case of the term contracts, with the futures we are exposed to the risk that our vision of the contract is not correct.
If you use the futures contracts as covering instruments you will loose the potential benefits of the movement in future prices.
Being the contracting terms standardized, there doesn’t exist futures contracts for all the instruments nor for all the merchandise and they might not cover exactly all the cash positions.