Answer-first summary for fast verification
Answer: Compared to an exchange-traded derivative, a disadvantage of OTC derivatives is their relative lack of fungibility; i.e., difficulty in unwinding position or assigning to another counterparty
The true statement is **D**. OTC derivatives are often customized, which makes them less fungible than exchange-traded derivatives. As a result, they can be harder to unwind or transfer to another counterparty. Why the others are false: - **A**: Exotic/customized products can be socially useful because they help market participants hedge specific risks. - **B**: Customization usually means **lower liquidity**, not better liquidity; basis risk is not generally improved in this way. - **C**: Market value is typically far below gross notional because the notional amount does not represent the full market value of the contracts.
Author: Manit Arora
Ultimate access to all questions.
Q-601.3. In a comparison between exchange-traded derivatives and over-the-counter (OTC) derivatives, which of the following statements is TRUE?
A
Customized OTC derivatives are exotic, and exotic products are not socially useful
B
Compared to an exchange-traded derivative, a customized OTC derivative offers better liquidity but greater basis risk
C
Due to the leverage inherent in customized OTC derivatives, the total market value of OTC derivatives is nearly 100% of their gross notional outstanding
D
Compared to an exchange-traded derivative, a disadvantage of OTC derivatives is their relative lack of fungibility; i.e., difficulty in unwinding position or assigning to another counterparty
No comments yet.