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An insight into OTC Derivatives


 · Over-the-counter (OTC) is a security traded in some context other than on a formal exchange such as the New York Stock Exchange (NYSE), Toronto Stock.  · Finance & Development. There are two basic ways to organize financial markets—exchange and over the counter (OTC) All were traded on OTC markets.

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I would imagine the main difference is one is more transparent than the next. I like to trade them, as long as I make money I am happy. Haven't you thought that in case of the starting of the account and the selection of exchange you need to observe to the principles? I mean improving the abilities of dealing, as well as the advancing of trading procedures! A very advanced person can create his personal indicators or even trade automates!

Anyway, all these bases on one important thing that we all, without exception, have to exploit: Get any live and demo trading platform for stocks, futures, options, forex. Ask New Question Sign In. Quora uses cookies to improve your experience. What is the difference between exchange listed options and OTC market options that make automatic market making possible? Answered Apr 22, I'd like to write some thoughts myself here.

The biggest difference between exchange options and OTC options is liquidity. Exchange options is more liquid, many investors and other market makers trade on them, thus there is "market quotes". Of course a bit more complicated as more risk factors to options except for delta, like vega, gamma and theta. The OTC market is different, usually the market maker need to provide exotic options products, which are customized by client and not liquid.

There is no "market quote" price, you need to synthesize it using other liquid product , pricing for it yourself, and sell to client with some premium. The risk is if price valued by yourself accurate or not. Also the requirement for such a product it not frequent. So it makes it very difficult of automatic market making on such product. BTW, the OTC exotic products are similar to the art investment market, which is also not liquid and you need to judge the value pricing yourself.

What are the differences similarities? Exactly how do option market-making desks manage their hedges of delta and other Greeks? Is it different for vanilla options vs. What are the exit options for a quantitative trader doing automated options market making? Is it possible to make profit without predicting the direction of the market? Well, I can't speak from personal experience, but there's not not necessarily anything about the options that makes automatic market making impossible , but it's probably not economical.

I would guess that most OTC options have been customized to meet a particular client's needs. Also, the counterparty risks are smaller in exchange-traded markets with all trades on exchanges being settled daily with the clearinghouse.

On the other hand, the flexibility of OTC market means that they suit better for trades that do not have high order flow or special requirements. In this context, OTC market performs the role of an incubator for new financial products. Swaps are widely regarded as the first modern example of OTC financial derivatives. All OTC derivatives are negotiated between a dealer and the end user or between two dealers. Inter-dealer brokers IDBs also play an important role in OTC derivatives by helping dealers and sometimes end users identify willing counterparties and compare different bids and offers.

OTC Contracts can be broadly classified on the basis of the underlying asset through which the value is derived:. The underlying asset is a standard interest rate. The underlying are physical commodities like wheat or gold.

It transfers the credit risk from one party to another without transferring the underlying. These can be funded or unfunded credit derivatives. OTC markets have two dimensions to it, namely customer market and interdealer market. In customer market, bilateral trading happens between the dealers and customers.

This is done through electronic messages which are called dealer-runs providing the prices for buying and selling the derivatives. On the other hand, in the interdealer market, dealers quote prices to one other to offset some of the risk in the trade.

This is passed on to other dealers within fractions. This clearly provides a view point on the customer market. Companies prefer to take loans from banks at a fixed rate of interest in order to avoid the exposure to rising rates. This can be achieved through interest rate swap which locks the fixed rate for a term of loan. Currency derivatives allow companies to manage risk by locking the exchange rate, beneficial for importer or exporter companies that face the risk of currency fluctuations.

Financing in terms of expansion can only be available if the future selling price is locked. This price risk protection is provided through customized OTC derivative. Crude Oil producer would like to increase production in tandem to increase in the demand.

The financing will be done only if the future selling price of the crude is locked. Although OTC Derivatives is a good tool for corporate, it does need more education to attract investors and be used on frequent basis. Investing in the right company.

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OTC promotes heavy competition between counter parties and hence lower transaction execution costs.

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Bei Derivaten mit symmetrischem Risikoprofil unbedingte Termingeschäfte vereinbaren die beiden Parteien Käufer und Verkäufer die Lieferung einer bestimmten Menge des Basiswertes zu einem vorher festgelegten Preis und einem Termin in der Zukunft.

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