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FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

Which feature is generally true of an exchange-traded derivative contract but NOT of a typical bilaterally negotiated OTC derivative?

Standardized contract terms set by the exchange, such as contract size and maturity, are characteristic of exchange-traded derivatives. OTC contracts are privately negotiated and can be customized, with bilateral credit arrangements and less transparency.

  1. AContract terms such as size and maturity are standardized by the exchangeCorrect
  2. BCounterparties can tailor the payoff to match an exact hedging need
  3. CCounterparty credit risk is managed only through bilateral credit support agreements
  4. DTrades are always confidential between the two parties with no price transparency

Explanation

Exchanges specify standardized contract terms (size, delivery dates, settlement), which supports liquidity and clearing. Customization and bilateral credit support are hallmarks of OTC markets, and exchange trading generally offers more price transparency, not less.

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