Final answer:
The main tradeoff between forward and futures contracts involves design flexibility and credit risk, with forwards being more customizable and bearing higher counterparty risk, while futures are standardized and have lower credit risk due to the involvement of a clearinghouse.
Step-by-step explanation:
The main tradeoff between forward contracts and futures contracts includes several aspects. However, when considering design flexibility, credit risk, and liquidity risk, the correct answer to this question is: E. Choices a and b only
Design flexibility is a significant factor as forward contracts can be customized according to the needs of the counterparties involved, whereas futures contracts are standardized products traded on exchanges. Credit risk is another critical tradeoff; in forward contracts, because they are private agreements, there is a counterparty risk that one party may not fulfill their obligation. In contrast, futures contracts are cleared through a clearinghouse which greatly reduces this risk. Liquidity risk can be a consideration for these instruments, but it is more a feature of the market and instrument specifics rather than a fundamental tradeoff between the two.