CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
A dealer in the OTC derivatives market most likely:
An OTC derivatives dealer most likely offers customized contracts and takes the other side of clients' trades, then manages the resulting risk. It is not the clearinghouse of an exchange, and unlike a broker that only arranges trades, a dealer holds positions as principal.
- Aacts as the clearinghouse for exchange-traded contracts
- Boffers customized contracts and takes the other side of clients' tradesCorrect
- Conly brokers trades without ever holding a position in the contract
Explanation
Dealers (often large banks) make markets in OTC derivatives, tailor contracts, and take the opposite side of client trades, then hedge their risk. Clearinghouses are separate entities, and brokers, not dealers, merely arrange trades.
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