Forwards preferred for hedging: liquidity?

CFA Level III Economics
#1

Guys,

When they say that forwards are preferred for hedging instead of futures, one of the reasons they mention is as follows:

“Trading volume of FX forwards and swaps dwarfs that of FX futures, providing better liquidity”.

How can lower volumes provide better liquidity???

#2

They said that the volume (of FX forwards and swaps) is _ higher _ (than that of FX futures), not lower.

#3

So, its a matter of english? Hahaha

I always thought that futures had higher liquidity + volumes though, right?

I mean, it’s one of the reasons they standardized contracts in the first place, so it could be more liquid/have higher volumes.

#4

Could well be. In English, to dwarf something is to make it look small or insignificant by comparison.

I’m not sure if they standardized the contracts precisely so that they would be more liquid; they probably did so to make the job of the clearinghouse easier. Higher liquidity and volume is just a nice byproduct.

And it may well be that FX forwards and swaps have a (much) higher volume than FX futures; it wouldn’t surprise me that most companies that use them have very specific needs for which standardized contracts would be unsuitable.

#5

Yeah, makes sense. I guess higher volumes on futures are likely centralized on interest rate derivatives.

#6

Thanks s2000magician.

#7

You’re quite welcome.