A risk management professional working at a trading company is evaluating the strategies proposed by an analyst for hedging the various positions within the company's trading portfolio. In the analysis, the professional notes that the analyst has recommended using exchange-traded derivatives for hedging most of these positions. What is one advantage of using exchange-traded derivatives for this hedging strategy?

Exam-Like

Exchange-based derivatives can be traded without incurring transaction costs.

4.2%

Exchange-based derivatives offer flexibility in terms of customizing the hedging instrument to match the position that the firm wants to hedge.

11.3%

Exchange-based derivatives are typically more effective in reducing basis risk in a hedging transaction compared to bilateral OTC derivatives.

14.1%

Exchange-based derivatives can minimize counterparty credit risk through the use of netting and margin requirements.

70.4%

Financial Risk Manager Part 1