Futures contracts are superior to forward contracts because they ensure that a firm can perfectly hedge its exposures to volatility.

Question

Quizplus · Accepted Answer

Futures contracts, while standardized and traded on exchanges which provide liquidity and reduce counterparty risk, do not ensure a perfect hedge due to potential basis risk (the risk that the futures price and the spot price will not move in tandem) and the fact that the standardized nature of futures may not match the firm's exact hedging needs as closely as a customized forward contract might.

Futures Contracts Are Superior to Forward Contracts Because They Ensure