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Hello Sir, Hope you are well. 🙂
I have seen your comments on derivatives quite frequently from the last few days & I also wanted to clear up few things for the exam like:Can you please explain me about these things:
1) Exchange-traded and OTC derivatives.
2) What is the difference between the two of them?
3) How do we distinguish a derivative whether it is an exchange-traded derivative or OTC derivative?
4) What are the Benefits of using one over the other?
5) What do Standardized Contracts refer to?As far as Paper FM is concerned, there are no OTC derivatives!
Futures are derivatives because their value depends on the exchange rate in the case of exchange rate futures (or depends on the current interest rate in the case of interest rate futures).
Futures are traded on the futures exchanges.OTC is over the counter and refers to ‘private’ arrangements directly with the bank.
Option can be OTC or can be traded on the exchanges.You are not required to distinguish between OTC and traded. It it is of any relevant in the exam (which is unlikely because calculations in Paper FM are only asked on the things that I explain in my free lectures) then you will be told.
I explain the benefits in the lectures. OTC arrangements can be tailored to our exact requirements. Traded instruments ensure a fair price.
Traded options and futures can only be dealt in fixed size contracts,
All of this is explained in my free lectures, so please do not expect me to type out all of my lectures again here. The lectures are a complete free course and cover everything needed to be able to pass the exam well 🙂
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