Understanding OTC Derivatives: Interest Rate Swaps

Medium Derivative Markets And Instruments Over-the-counter Derivatives

Over-the-counter (OTC) derivatives are financial instruments that are traded directly between parties, often without a centralized exchange or broker. Understanding their characteristics is essential for navigating their complexities, including credit risk, liquidity risk, and regulatory considerations.

A company, ABC Corp, has entered into an interest rate swap agreement with a financial institution to exchange fixed interest rate payments for floating interest rate payments based on a notional amount. Which of the following statements about this OTC derivative transaction is true?

The OTC derivative market is always regulated by a central authority ensuring transparency.

OTC derivatives can be customized to fit the specific needs of the counterparties involved.

Interest rate swaps can only occur with standardized terms and notional amounts as defined by exchanges.

Hint

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