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CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses

Compared with exchange-traded derivatives cleared through a central counterparty, over-the-counter derivatives traded bilaterally most likely expose a party to greater:

OTC bilateral derivatives expose parties to greater counterparty credit risk. Without a central counterparty guaranteeing performance, each side depends on the other's ability to pay. Standardization and daily margin are characteristics of exchange-traded, cleared contracts, so they are not greater for OTC trades.

  1. Adaily mark-to-market margin requirements.
  2. Bstandardization of contract terms.
  3. Ccounterparty credit risk.Correct

Explanation

Bilateral OTC contracts rely on the other party's ability to perform, with no clearinghouse guarantee, so counterparty credit risk is higher. Standardized terms and daily margining are features of exchange-traded, centrally cleared contracts, not OTC ones.

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