There are wide range of derivatives products available in this modern environment.
The two key types of Derivatives Markets include:
Over the Counter (OTC)
Over The Counter is a market place collective sum of brokers, institutions, dealers do buying and/or selling the contracts via electronic media, telephone etc., which links thousands of intermediaries. The OTC derivative markets consist of participants include: banks, hedge funds, financial institutions and high net worth individuals.
The OTC derivatives markets – transactions among the dealing counter parties, have following features compared to exchange traded derivatives:
- Contracts are tailor made to fit in the specific requirements of dealing counter parties.
- The management of counter-party (credit) risk is decentralized and located within individual institutions.
- There are no formal centralized limits on individual positions, leverage, or margining.
- There are no formal rules or mechanisms for risk management to ensure market stability and integrity, and for safeguarding the collective interest of market participants.
- Transactions are private with little or no disclosure to the entire market.
Exchange Traded Contracts
Exchange traded contracts are standardized, traded on organized exchanges with prices determined by the interaction of buyers and sellers through anonymous auction platform. A clearing house/ clearing corporation, guarantees contract performance (settlement of transactions).
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In our next educational series we would discuss on ‘Importance of Derivatives‘
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