Financial Risk Manager Part 1

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A risk manager at a trading firm is assessing the strategies proposed by an analyst to hedge several positions in the firm's trading portfolio. The risk manager notes that the analyst recommends the use of exchange-based derivatives to hedge most of the positions. Which of the following is an advantage of using exchange-based derivatives for hedging?

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

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

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

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