Swaps and Forward contracts are similar in the fact that they both deal with pay

Question

Swaps and Forward contracts are similar in the fact that they both deal with payments in the future, and there is a determined price. Both of these contracts allow for them to be customized to specific terms. Both the forwards and swaps do not require cash up front payments until the end of the contract, nor are they traded on a specific exchange. They both are used to manage risk in various capacities. However, there is a risk of default from the other party in each case. On the other side, these types of contracts differ in the fact with a forward contract they deal with one type of transaction or payment at a future date unlike a swap which deals with multiple transactions, where one party swaps payments from one person to another. These types of swap contracts involve a series of payments in the future. In addition there can be several types of these which are currency, interest equity and commodity swaps, unlike a forward where there is a specific type of contract. Discussion Question: In what types of situations do you think using a forward would be better than using a swap? I need you to please answer this discussion question asked by my classmate in a simple way to further the discussion above. Thanks

Explanation / Answer

Situations where forward contracts are better than swaps:

1) Forward contracts are highly liquid. The investor can cancel the contract or postpone the contract or prepone the contract. Whereas Swaps do not have high liquidity.

2) When the investor does not want to take the currency risk and wants a fixed amount, it is better to choose forward contract as it gives a fixed amount without depending on underlying factors.

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