A risk manager is deciding between using futures or forward contracts to hedge a forward...

Tailing the hedge refers to adjusting the number of futures contracts required to hedge a position given that futures contracts result in daily cash flows from daily P&L. In the case of forward contracts, P&L is not settled daily but at the end of the contract. Because margin payments (ie the daily P&L) for futures contracts create interest cost or income (depending upon the direction of the flows), the number of contracts required to hedge a given position can fluctuate. This effect is generally small for small positions, or where the time period under consideration is not very long. But it can get large for larger positions that are open for longer time periods, therefore requiring an adjustment to 'tail the hedge'. The adjustment is straightforward - the number of contracts required needs to be divided by (1+r)t, where r is the interest and t the time period (or by ert if continuously compounded rates are being used. Therefore statement I is true and statement II is false.

Statement III is not correct as counterparty risk is certainly an issue for forward contracts, while futures contracts are guaranteed by the exchange, besides having margin requirements and daily P&L movement in place.

Statement IV is not correct as futures come in standardized contracts with standard amounts and a few standard expiry dates to pick, whereas forward contracts are customized and dates, amounts and other details of the contract can be negotiated.