Advantages and Disadvantages of Various Hedges Forward Contracts: Advantages - Can be written for any amount and term

- Offers a complete hedge Disadvantages - Difficult to find a counterparty (no liquidity) - Requires tying up capital - Subject to default risk Futures Contracts: Advantages - Lots of liquidity - Position can be reversed easily - Doesnt tie up much capital Disadvantages - Written for fixed amounts and terms - Offers only a partial hedge - Subject to basis risk (bond issuer can default) Options: Advantages - Limits potential losses without limiting potential gains - Doesnt tie up much capital - Position can be reversed Disadvantages - Written for fixed amounts and terms - Not much liquidity - Subject to basis risk - Offers only a partial hedge Swaps: Advantages - Reduces transactions costs - Maintains informational advantages - Very long time period hedge possible Disadvantages - Not much liquidity - Subject to default risk