Financial Risk Manager Part 1

Explanation

Exchange-traded instruments are indeed standardized and can be traded on an exchange. This standardization is a key feature of these instruments, as it allows for a more liquid and transparent market. The standardization refers to the fact that the terms and conditions of the contracts are set by the exchange, and therefore, all contracts of the same type and expiry date are identical. This makes them easily tradable on the exchange, as any buyer can be matched with any seller. Examples of exchange-traded instruments include futures and options.

On the other hand, over-the-counter (OTC) instruments are non-standardized and are privately negotiated. This means that the terms and conditions of the contracts are agreed upon by the two parties involved, making each OTC contract unique. Because of this, OTC contracts cannot be traded on an exchange. Instead, they are traded directly between two parties, either through a dealer network or in a decentralized manner. Examples of OTC instruments include forwards and swaps.

Choice B is incorrect. Over-the-counter instruments are not standardized and exchange-tradable. Instead, they are non-standardized, privately negotiated financial contracts that cannot be traded on an exchange. This is the opposite of what is stated in this choice.

Choice C is incorrect. The type of assets dealt with by exchange-traded or over-the-counter instruments does not strictly depend on whether they are tangible or intangible. Both types of instruments can deal with a variety of assets including both tangible commodities and intangible financial assets.

Choice D is incorrect. The time to maturity for both exchange-traded and over-the-counter instruments can vary widely and does not necessarily follow the pattern suggested in this choice. It depends more on the specific terms agreed upon by the parties involved in each individual contract.