Answer: Trades are made in such a way as to reduce credit risk.

## Explanation **Correct Answer: B** - Trades are made in such a way as to reduce credit risk. **Analysis of Options:** **A. Terms are not specified.** - ❌ **Incorrect** - Exchange-traded products have standardized terms and specifications - This standardization is actually an advantage, not a disadvantage **B. Trades are made in such a way as to reduce credit risk.** - ✅ **Correct** - Exchange trading systems use central counterparties (CCPs) and clearing houses - The clearing house becomes the counterparty to both sides of the trade - This significantly reduces counterparty credit risk compared to OTC markets **C. Participants have flexibility to negotiate.** - ❌ **Incorrect** - This is actually an advantage of OTC markets, not exchange trading - Exchange-traded products have standardized terms with little negotiation flexibility **D. In the event of a misunderstanding, calls are recorded between parties.** - ❌ **Incorrect** - This describes features of some OTC trading arrangements - Exchange trading relies on standardized electronic systems, not recorded calls **Key Advantages of Exchange Trading Systems:** - **Reduced credit risk** through central clearing - **Standardization** of contract terms - **Price transparency** - **Regulatory oversight** - **Liquidity** through centralized trading This aligns with the comparison table provided in the text showing that exchange-traded markets are "backed by a clearing house" which reduces default risk.

Author: LeetQuiz Editorial Team