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Answer: Lower basis risk
The chief advantage of an **OTC hedge** is **lower basis risk** because OTC contracts can be customized more precisely to the hedger’s exposure. Exchange-traded contracts are more standardized, which can create a mismatch between the hedge instrument and the underlying exposure.
Author: Manit Arora
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Question 135.4 What is the chief advantage of a derivatives trade that intends to hedge an exposure on the OTC market over a similar trade on an exchange?
A
Greater liquidity
B
Lower counterparty risk
C
Lower basis risk
D
Ability to trade an option instead of a futures contract
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