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