Understanding OTC Derivatives Characteristics

Hard Derivative Markets And Instruments Over-the-counter Derivatives

In the context of derivative markets, over-the-counter (OTC) derivatives are financial contracts that are traded directly between two parties without a centralized exchange. These contracts can be customized to meet the specific needs of the involved parties. However, this customization introduces certain implications for liquidity, regulatory oversight, and counterparty risk.

Which of the following statements regarding over-the-counter derivatives is true?

OTC derivatives are always standardized and regulated by a central authority.

OTC derivatives carry higher counterparty risk compared to exchange-traded derivatives.

All OTC contracts must be reported to a central clearinghouse regardless of the parties' agreement.

Hint

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