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.