Advantage of Exchange-Traded Options over OTC Options

Hard Derivative Markets And Instruments Exchange-traded Derivatives

In recent years, the use of exchange-traded derivatives has significantly increased in various financial markets. These instruments are known for their transparency and standardized contracts. Consider the following scenario:

XYZ Corporation is reviewing options on futures that are traded on a commodity exchange. The company wants to hedge against potential fluctuations in the price of crude oil. They are exploring the differences in risk and benefits between using exchange-traded options and over-the-counter (OTC) options for this purpose.

Based on their analysis, what would be the primary advantage of choosing exchange-traded options over OTC options for XYZ Corporation?

Exchange-traded options often provide greater customization options to match specific hedging needs.

Exchange-traded options allow for more efficient price discovery due to higher trading volumes and market participation.

Exchange-traded options have a longer duration until expiration compared to most OTC options.

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