Answer-first summary for fast verification
Answer: BETTER liquidity
**Correct answer: B. BETTER liquidity** Exotic derivatives typically have **non-standard terms**, which means they are usually **less liquid** than plain vanilla derivatives. Their main advantages are often **customization**, which can lead to **lower basis risk** and therefore **better hedge effectiveness**. Because many exotic derivatives are traded OTC rather than on an exchange, they also often involve **higher counterparty risk**.
Author: Manit Arora
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Q-1 09.01. In comparison to a plain vanilla derivative, each of the following is true of an EXOTIC derivative EXCEPT for (most likely answer):
A
BETTER hedge effectiveness
B
BETTER liquidity
C
LOWER basis risk
D
HIGHER (more) counterparty risk
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