Cryptocurrency Q&A
What is the difference between exchange traded and OTC derivatives?
What is the difference between exchange traded and OTC derivatives?
EchoSoulQuantum
Tue Oct 01 2024
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7 answers
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Can you explain the key distinctions between exchange traded and OTC derivatives? Are there specific advantages or disadvantages associated with each type? Additionally, how do the regulatory frameworks for these two types of derivatives differ, and what impact does this have on investors? Understanding these nuances is crucial for navigating the complex world of derivatives trading.
7 answers
HanRiverVisionaryWave
Thu Oct 03 2024
OTC derivatives, or over-the-counter derivatives, are financial instruments that are traded bilaterally between two parties without going through a centralised exchange. They offer significant flexibility and can be tailored to meet the specific needs of the counterparties involved.
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alexander_jackson_athlete
Thu Oct 03 2024
However, one of the primary drawbacks of OTC derivatives is the heightened counterparty risk. This refers to the risk that one of the parties to the contract may default on their obligations, leading to potential financial losses for the other party.
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BonsaiLife
Thu Oct 03 2024
In contrast, exchange-traded derivatives are traded on a regulated exchange and have standardised contracts that are cleared through a central clearinghouse. This setup provides greater liquidity and reduced counterparty risk, as the clearinghouse acts as an intermediary between the two parties.
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SamsungShiningStar
Thu Oct 03 2024
Exchange-traded derivatives also offer transparency, as all trades are recorded and can be accessed by the public. This promotes fair pricing and reduces the potential for manipulation.
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Riccardo
Wed Oct 02 2024
However, the standardised nature of exchange-traded derivatives means that they offer less customisation compared to OTC derivatives. This can be a disadvantage for investors who require specific terms and conditions that are not covered by the standardised contracts.
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