CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
Compared with exchange-traded derivatives, over-the-counter (OTC) derivatives are most likely to:
OTC derivatives are most likely customized to the needs of the two counterparties. They are privately negotiated, so size, maturity and other terms can be tailored, whereas exchange-traded contracts are standardized, trade on a central venue and are typically guaranteed by a clearinghouse.
- Abe standardized with a clearinghouse guaranteeing each trade.
- Btrade on a central exchange with transparent prices.
- Cbe customized to the needs of the two counterparties.Correct
Explanation
OTC derivatives are privately negotiated, so terms such as size, maturity and underlying can be tailored to the counterparties. Standardization, exchange trading and clearinghouse guarantees are features of exchange-traded contracts.
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