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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

Which statement about exchange-traded derivatives compared with OTC derivatives is correct?

Exchange-traded derivatives are standardised in contract size, expiry and terms, and the clearing corporation guarantees settlement, which removes counterparty risk. Customised terms and higher default risk are features of OTC derivatives, and margins are required on exchange contracts.

  1. AExchange-traded contracts are standardised and the clearing corporation guarantees settlementCorrect
  2. BExchange-traded contracts are customised to each party's needs
  3. CExchange-traded contracts carry higher counterparty default risk
  4. DExchange-traded contracts have no margin requirement

Explanation

Exchange-traded derivatives have standard terms and are novated to a clearing corporation that guarantees performance, lowering counterparty risk, and margins are collected. Customisation and higher counterparty risk describe OTC contracts.

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