FRM Part I · FRM Exam Part I · Exchanges and OTC Markets
Which feature is typical of exchange-traded derivatives but NOT of traditional bilaterally settled OTC derivatives?
Transparent, publicly quoted trading and pricing information is typical of exchange-traded derivatives. Traditional bilateral OTC trades are negotiated privately with individually set terms and direct counterparty credit exposure, whereas exchanges use standardized contracts and margining through a clearing house.
- AContract terms negotiated individually between two parties
- BTrading and pricing information that is generally public and quoted transparentlyCorrect
- CAbsence of any margin or collateral requirement
- DCredit exposure borne entirely by each counterparty to the other
Explanation
Exchanges publish prices and volumes, giving pre- and post-trade transparency. OTC trades are negotiated privately, with terms individually set and exposure to the counterparty directly. Margining is a feature of exchanges, not an absence.
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