CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
Compared with over-the-counter (OTC) derivatives, exchange-traded derivatives most likely have:
Exchange-traded derivatives have standardized terms and use a clearinghouse as the counterparty to both sides of each trade. Customized terms and bilateral counterparty credit risk describe traditional OTC derivatives, so those two options are wrong.
- Acustomized terms negotiated between the two parties
- Bstandardized contract terms and a clearinghouse as counterparty to each sideCorrect
- Cgreater counterparty credit risk because trades are bilateral
Explanation
Exchange-traded contracts have standardized terms and are cleared through a clearinghouse that becomes the buyer to every seller and the seller to every buyer. Customization and bilateral credit exposure are features of traditional OTC contracts.
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