Do derivatives trade OTC?

An over-the-counter (OTC) derivative is a financial contract that does not trade on an asset exchange, and which can be tailored to each party’s needs. Depending on where derivatives trade, they can be classified as over-the-counter or exchange-traded (listed).

What are the difference between exchange traded and over the counter in derivatives market?

Exchange traded derivatives (ETD) are traded through central exchange with publicly visible prices. Over the Counter (OTC) derivatives are traded between two parties (bilateral negotiation) without going through an exchange or any other intermediaries.

What advantage do over the counter derivatives have over exchange traded derivatives?

Exchange traded derivatives have become increasingly popular because of the advantages they have over over-the-counter (OTC) derivatives, such as standardization, liquidity, and elimination of default risk.

Which derivative is not traded on exchange?

Under swap contracts, the underlying security is the interest rate or currency, as these contracts protect both parties from several major risks. These contracts are not traded to the Stock Exchange as investment banker plays the role of a middleman between these contracts.

What is meant by over the counter trading?

An over-the-counter (OTC) market is a decentralized market in which market participants trade stocks, commodities, currencies, or other instruments directly between two parties and without a central exchange or broker. Because of this, liquidity in the OTC market may come at a premium.

What characterizes an OTC or over the counter option?

OTC options are exotic options that trade in the over-the-counter market rather than on a formal exchange like exchange traded option contracts. OTC options are the result of a private transaction between the buyer and the seller.

What is OTC contract?

An over-the-counter is a bilateral contract in which two parties (or their brokers or bankers as intermediaries) agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. Forwards and swaps are prime examples of such contracts.

How are OTC markets regulated?

The Financial Industry Regulatory Authority (FINRA) regulates broker-dealers that operate in the over-the-counter (OTC) market. Many equity securities, corporate bonds, government securities, and certain derivative products are traded in the OTC market.

Why should derivatives be regulated like commodity futures?

Third, derivatives are regulated because while derivatives can be useful for hedging, they are also ideal instruments for speculation. Derivatives speculation in turn is linked with a variety of economic ills—including increased systemic risk when derivatives speculators go bust.