Chartered Financial Analyst Level 1
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An end user seeking to hedge a specific underlying exposure with non-standard size and settlement dates would most likely trade in which market?
Explanation:
Explanation:
Option A (Futures market): Incorrect because futures contracts are standardized in terms of size, settlement dates, and underlying assets, making them unsuitable for hedging non-standard exposures.
Option B (Over-the-counter derivative market): Correct. OTC contracts offer flexibility in terms of size, settlement dates, and underlying assets, allowing customization to match specific risk exposure profiles. This makes them ideal for end users with non-standard hedging needs.
Option C (Exchange-traded derivative market): Incorrect. ETD contracts are highly standardized, with terms such as contract size, quality, and maturity dates set by the exchange. This standardization enhances liquidity and transparency but limits customization for non-standard exposures.