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

Which statement best distinguishes an exchange-traded derivative from an over-the-counter (OTC) derivative in India?

Exchange-traded derivatives are standardised in terms such as lot size and expiry and are cleared by a clearing corporation that guarantees settlement, reducing counterparty risk. OTC contracts are customised bilateral agreements and carry greater counterparty risk.

  1. AExchange-traded contracts are standardised and cleared through a clearing corporation, which reduces counterparty riskCorrect
  2. BOTC contracts are standardised in lot size and expiry, while exchange-traded contracts are fully customised
  3. CExchange-traded contracts carry higher counterparty default risk than OTC contracts
  4. DOTC contracts are always guaranteed by a clearing corporation

Explanation

Exchange-traded derivatives have standard lot size and expiry, and the clearing corporation becomes the counterparty to both sides through novation, which lowers default risk. OTC contracts are customised and bilateral, so the other options reverse the facts.

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