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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
- Doesn't tie up much capital
Disadvantages
- Written for fixed amounts and terms
- Offers only a partial hedge
- Subject to basis risk (bond issuer can default)
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