{"id":34644,"date":"2022-11-26T10:54:20","date_gmt":"2022-11-26T10:54:20","guid":{"rendered":"https://www.5paisa.com/finschool/?p=34644"},"modified":"2025-06-04T17:45:20","modified_gmt":"2025-06-04T12:15:20","slug":"what-are-over-the-counter-otc-derivatives","status":"publish","type":"post","link":"https://www.5paisa.com/finschool/what-are-over-the-counter-otc-derivatives/","title":{"rendered":"OTC Derivatives: Meaning, Types, Advantages \u0026#038; Risk"},"content":{"rendered":"\u003cdiv data-elementor-type=\u0022wp-post\u0022 data-elementor-id=\u002234644\u0022 class=\u0022elementor elementor-34644\u0022\u003e\u003csection class=\u0022elementor-section elementor-top-section elementor-element elementor-element-993586f elementor-section-boxed elementor-section-height-default elementor-section-height-default\u0022 data-id=\u0022993586f\u0022 data-element_type=\u0022section\u0022\u003e\u003cdiv class=\u0022elementor-container elementor-column-gap-default\u0022\u003e\u003cdiv class=\u0022elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-09a8c58\u0022 data-id=\u002209a8c58\u0022 data-element_type=\u0022column\u0022\u003e\u003cdiv class=\u0022elementor-widget-wrap elementor-element-populated\u0022\u003e\u003cdiv class=\u0022elementor-element elementor-element-a7ab6e6 elementor-widget elementor-widget-text-editor\u0022 data-id=\u0022a7ab6e6\u0022 data-element_type=\u0022widget\u0022 data-widget_type=\u0022text-editor.default\u0022\u003e\u003cdiv class=\u0022elementor-widget-container\u0022\u003e\u003ch2\u003e\u003cstrong\u003eIntroduction\u003c/strong\u003e\u003c/h2\u003e\u003cul\u003e\u003cli\u003eOver the counter derivative are traded between two parties without going through an exchange or any other intermediaries. It refers to stocks that trade via dealer network and not any centralized exchange. These are known as unlisted stocks where the trading is carried out through by broker-dealers.\u003c/li\u003e\u003c/ul\u003e\u003ch2\u003e\u003cstrong\u003eWhat are the over the counter derivative\u003c/strong\u003e\u003c/h2\u003e\u003cul\u003e\u003cli\u003eDerivative Contract are signed directly between the parties without the involvement of any stock market platforms or other middlemen. Stocks that trade through a different dealer are known as Over the counter derivative. These are known as unlisted stocks where brokers and dealers trade securities over the counter. OTC provides higher flexibility because the terms and conditions are open for negotiation and customization.\u003c/li\u003e\u003c/ul\u003e\u003ch2\u003e\u003cstrong\u003eDefinition\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u003cstrong\u003eAn Over the Counter Derivative is a financial contract that is arranged between two counterparties but with minimal intermediation or Regulation.\u003c/strong\u003e\u003c/p\u003e\u003ch2\u003e\u003cstrong\u003eHow Do OTC Derivatives Work?\u003c/strong\u003e\u003c/h2\u003e\u003cul\u003e\u003cli\u003eOver the Counter Derivatives are private financial agreement. It is negotiated between counterparties without going through an exchange or other type of formal intermediaries. Listed contracts are more structured and standardized contracts that trade on stock exchanges subject to more regulations. \u003c/li\u003e\u003cli\u003eTherefore over the counter derivatives could be negotiated and customized to suit the exact risk and return needed by each party. Although this type of derivative offers flexibility it does possess credit risk. This type of derivative offers flexibility but because there is no clearing agency, it also carries credit risk.\u003c/li\u003e\u003c/ul\u003e\u003ch2\u003e\u003cstrong\u003eWhat are Derivatives and Derivatives Trading?\u003c/strong\u003e\u003c/h2\u003e\u003cul\u003e\u003cli\u003eDerivatives are the instruments which include security derived from debt instrument share, loan , risk instrument or contract for differences of any other form of security and a contract that derives its value from the price/index of prices of underlying securities. Derivative is contract that derives it value from the underlying asset.\u003c/li\u003e\u003cli\u003eDerivative Trading involves both buying and selling of these financial contracts in the market. With derivatives the trader can make profit by predicting the future price movement of the underlying asset. Derivative Trading in the share market is better than buying the underlying asset.\u003c/li\u003e\u003c/ul\u003e\u003ch2\u003e\u003cstrong\u003eTypes of OTC Derivatives Market\u003c/strong\u003e\u003c/h2\u003e\u003ch3 style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e1. Inter-dealer Markets\u003c/strong\u003e\u003c/h3\u003e\u003cul\u003e\u003cli\u003eAn Inter-dealer market is a trading market that is accessible only by banks and financial institutions. It is an Over the Counter Derivative Market that is not restricted to a physical location. It is a global market comprised of a network of dealers in which the representatives of banks and financial institutions execute trades. Currency transactions in the inter dealer market can be either speculative or customer driven.\u003c/li\u003e\u003cli\u003eThe dealers send quotes to the broker who, in effect, broadcasts the information by telephone. Brokers often provide trading platforms such as dark pools to give their clients the ability to instantaneously post quotes to every other dealer in the broker’s network. The bulletin boards show bid, ask, and, sometimes, execution prices.\u003c/li\u003e\u003cli\u003eThe broker screens are normally not available to end-customers, who are rarely aware of changes in prices and the bid-ask spread in the interdealer market. Dealers can sometimes trade through the screen or over the electronic system. Some interdealer trading platforms allow automated algorithmic trading like that of the electronic exchanges. Otherwise the screens are merely informative, and the dealer must trade through the broker or call other dealers directly to execute a trade.\u003c/li\u003e\u003c/ul\u003e\u003ch3 style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e2. Customer Market:\u003c/strong\u003e\u003c/h3\u003e\u003cul\u003e\u003cli\u003eIn this type, over the counter trading is conducted between a dealer and the customer. In the customer market, bilateral trading occurs between dealers and their customers, such as individuals or hedge funds. Dealers often initiate contact with their customers through high-volume electronic messages called “dealer-runs” that list securities and derivatives and the prices at which they are willing to buy or sell them. The customers and dealers agree on the pricing for purchasing and selling derivatives. These prices are provided by dealers to customers.\u003c/li\u003e\u003c/ul\u003e\u003ch2\u003e\u003cstrong\u003eDifferences between Exchange Traded Derivatives and OTC derivatives.\u003c/strong\u003e\u003c/h2\u003e\u003ctable\u003e\u003ctbody\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003e \u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eExchange Traded Derivatives\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eOver the Counter Derivatives\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eNature of Transaction\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eThe stock exchange facilitates bilateral trading by acting as an intermediary\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eThis is a private transaction between two or more parties\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003ePrice Transparency\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eThere is Price Transparency\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eThere is no Price Transparency\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eMargin in Trade\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eMargin is set according to the stock exchange rules\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eThe collateral is negotiated between the parties that can be any amount or asset\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eMarket Participants\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eRetail and institutional investors market makers and authorized participants\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eTypically financial institutions hedge funds and large investors\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eTrading Hours\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eLimited to Specific exchange hours\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eContinuous 24/7\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eLiquidity\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eGenerally higher due to the large number of market participants\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eDepends on the size and frequency of the trades between the parties\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eRegulation\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eRegulated by government agencies such as SEC or CFTC\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eMinimal as there is no central authority to oversee the market\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eCosts\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eLower due to presence of price competition and the ability to take advantage of volume discounts.\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eTypically higher due to the absence of price competition\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003e\u003cstrong\u003eExecution Speed\u003c/strong\u003e\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eCan be slower due to the need for price matching and the potential for network delays.\u003c/p\u003e\u003c/td\u003e\u003ctd width=\u0022236\u0022\u003e\u003cp\u003eFast as transactions can be completed directly between the parties\u003c/p\u003e\u003c/td\u003e\u003c/tr\u003e\u003c/tbody\u003e\u003c/table\u003e\u003ch2\u003e\u003cstrong\u003eTypes of OTC Derivatives\u003c/strong\u003e\u003c/h2\u003e\u003ch4 style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e1. Interest Rate Derivatives\u003c/strong\u003e\u003c/h4\u003e\u003cp style=\u0022padding-left: 40px;\u0022\u003eInterest Rate Derivative is a financial derivative which derives its value from one or more interest rates, the price of interest rate instruments, or interest rate indexes. Swaps are the most common OTC Derivative that derives its value from the interest rates\u003c/p\u003e\u003ch4 style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e2. Commodity Derivatives\u003c/strong\u003e\u003c/h4\u003e\u003cp style=\u0022padding-left: 40px;\u0022\u003eA derivative contract, which has a commodity as its underlying asset is known as commodity derivative contract. The commodities traded under this derivative contract are agricultural as well as non-agricultural commodities\u003c/p\u003e\u003ch4 style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e3. Equity Derivatives\u003c/strong\u003e\u003c/h4\u003e\u003cp style=\u0022padding-left: 40px;\u0022\u003eThese derivatives derive their value from the underlying equity securities. The most popular OTC Equity derivative is OTC options.\u003c/p\u003e\u003ch4 style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e4. Currency Derivatives\u003c/strong\u003e\u003c/h4\u003e\u003cp style=\u0022padding-left: 40px;\u0022\u003eCurrency derivatives are futures and options contract that require trading a specific quantity of a particular currency pair at a future date. Currency derivative trading is comparable to stock and futures options trading. Here the underlying resources are currency pairings like USD/INR or EUR/INR.\u003c/p\u003e\u003ch4 style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e5. Credit Derivatives\u003c/strong\u003e\u003c/h4\u003e\u003cp style=\u0022padding-left: 40px;\u0022\u003eWithout any underlying asset exchange, one party transfers the credit risk to another. OTC trading in credit derivatives includes Credit Default Swap as well as Credit Linked Notes\u003c/p\u003e\u003ch2\u003e\u003cstrong\u003eAdvantages of OTC Derivatives\u003c/strong\u003e\u003c/h2\u003e\u003cul\u003e\u003cli\u003eIt allows small companies to engage in trade without listed on stock exchange.\u003c/li\u003e\u003cli\u003eSince the OTC derivatives are agreed upon privately. It allows the parties to have a much more flexible and customized contract\u003c/li\u003e\u003cli\u003eIt can be used for hedging, transferring trading risks, and as leverage for business operations.\u003c/li\u003e\u003cli\u003eOTC contracts are beneficial in hedging against credit risk\u003c/li\u003e\u003cli\u003eFor unlisted companies, it works as a mechanism to trade with lower cost and lesser regulations.\u003c/li\u003e\u003c/ul\u003e\u003ch2\u003e\u003cstrong\u003eDisadvantages of OTC Derivatives\u003c/strong\u003e\u003c/h2\u003e\u003cul\u003e\u003cli\u003eOTC contracts are inherently speculative, thus having the possibility of creating market integrity issues.\u003c/li\u003e\u003cli\u003eAny OTC Contracts runs the associated risk of credit or default as there is no central mechanism to clear and settle the transactions\u003c/li\u003e\u003cli\u003eOTC derivatives markets embody risks to financial market stability\u003c/li\u003e\u003cli\u003eThere are no regulations to cover these contracts.\u003c/li\u003e\u003cli\u003eThe integrity and stability of the market, as well as the protection of the interest of all markets players collectively, are not guaranteed by any explicit rules or systems.\u003c/li\u003e\u003cli\u003eCounterparty risk management is decentralized and carried out by separate institutions.\u003c/li\u003e\u003c/ul\u003e\u003ch2\u003e\u003cstrong\u003eRisks Hedged Using OTC Derivatives\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003eHedging is the process that helps reduce the financial asset risk. To hedge is to take an opposite position in a security or investment to balance out an existing trade’s price risk. Investors can protect themselves against unfavorable price changes in practically any investment, including stocks, bonds, interest rates , currencies, commodities, and so on.\u003c/p\u003e\u003cp style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e1. Currency Risk:\u003c/strong\u003e Using derivatives a trader can hedge or protect against currency rate fluctuations. Companies with a higher number of foreign currency transactions benefit from OTC derivatives. The way they ensure that the fluctuations do not increase their obligations or decrease their income.\u003c/p\u003e\u003cp style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e2. Interest Rate Risk\u003c/strong\u003e : An interest rate swap protects a trader from rising or falling interest rates in the market.\u003c/p\u003e\u003cp style=\u0022padding-left: 40px;\u0022\u003e\u003cstrong\u003e3. Commodity Risk :\u003c/strong\u003e Similar to currency risk, traders face the risk of fluctuations in prices of commodities such as gold, oil, agricultural produce and so on. By entering into a commodity derivative, the trader deals to buy or sell the commodity at a specific price. Hence the risk or fall beyond or below the agreed price does not impact the trader.\u003c/p\u003e\u003ch2\u003e\u003cstrong\u003eConclusion\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003eOver the Counter is trading securities via a broker dealer network as opposed on a centralized exchange. Through dealer networks, over-the-counter derivatives trading is carried out. These derivatives are frequently referred to as unlisted stocks. OTC derivatives trades are carried out by the broker/dealer network through direct negotiations in which the terms are agreed upon by both parties. Over-the-counter derivatives may be modified to precisely meet each participant’s risk and return criteria. Because there is no clearing corporation, this type of derivative offers freedom but also poses a credit risk.\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003csection class=\u0022elementor-section elementor-top-section elementor-element elementor-element-16ae37b elementor-section-boxed elementor-section-height-default elementor-section-height-default\u0022 data-id=\u002216ae37b\u0022 data-element_type=\u0022section\u0022\u003e\u003cdiv class=\u0022elementor-container elementor-column-gap-default\u0022\u003e\u003cdiv class=\u0022elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-c5b8c24\u0022 data-id=\u0022c5b8c24\u0022 data-element_type=\u0022column\u0022\u003e\u003cdiv class=\u0022elementor-widget-wrap elementor-element-populated\u0022\u003e\u003cdiv class=\u0022elementor-element elementor-element-9294715 elementor-widget elementor-widget-heading\u0022 data-id=\u00229294715\u0022 data-element_type=\u0022widget\u0022 data-widget_type=\u0022heading.default\u0022\u003e\u003cdiv class=\u0022elementor-widget-container\u0022\u003e\u003ch2 class=\u0022elementor-heading-title elementor-size-default\u0022\u003eFrequently Asked Questions (FAQs): -\u003c/h2\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003csection class=\u0022elementor-section elementor-top-section elementor-element elementor-element-94626eb elementor-section-boxed elementor-section-height-default elementor-section-height-default\u0022 data-id=\u002294626eb\u0022 data-element_type=\u0022section\u0022\u003e\u003cdiv class=\u0022elementor-container elementor-column-gap-default\u0022\u003e\u003cdiv class=\u0022elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-558f0ea\u0022 data-id=\u0022558f0ea\u0022 data-element_type=\u0022column\u0022\u003e\u003cdiv class=\u0022elementor-widget-wrap elementor-element-populated\u0022\u003e\u003cdiv class=\u0022elementor-element elementor-element-aef4355 elementor-widget elementor-widget-accordion\u0022 data-id=\u0022aef4355\u0022 data-element_type=\u0022widget\u0022 data-widget_type=\u0022accordion.default\u0022\u003e\u003cdiv class=\u0022elementor-widget-container\u0022\u003e\u003cdiv class=\u0022elementor-accordion\u0022\u003e\u003cdiv class=\u0022elementor-accordion-item\u0022\u003e\u003cdiv id=\u0022elementor-tab-title-1831\u0022 class=\u0022elementor-tab-title\u0022 data-tab=\u00221\u0022 role=\u0022button\u0022 aria-controls=\u0022elementor-tab-content-1831\u0022 aria-expanded=\u0022false\u0022\u003e\u003cspan class=\u0022elementor-accordion-icon elementor-accordion-icon-left\u0022 aria-hidden=\u0022true\u0022\u003e\u003cspan class=\u0022elementor-accordion-icon-closed\u0022\u003e\u003ci class=\u0022fas fa-plus\u0022\u003e\u003c/i\u003e\u003c/span\u003e\u003cspan class=\u0022elementor-accordion-icon-opened\u0022\u003e\u003ci class=\u0022fas fa-minus\u0022\u003e\u003c/i\u003e\u003c/span\u003e\u003c/span\u003e\u003ca class=\u0022elementor-accordion-title\u0022 tabindex=\u00220\u0022\u003eWhat is the similarity between OTC derivatives and exchange-traded futures?\u003c/a\u003e\u003c/div\u003e\u003cdiv id=\u0022elementor-tab-content-1831\u0022 class=\u0022elementor-tab-content elementor-clearfix\u0022 data-tab=\u00221\u0022 role=\u0022region\u0022 aria-labelledby=\u0022elementor-tab-title-1831\u0022\u003e\u003cp\u003eBoth OTC derivatives and exchange-traded futures are financial instruments used for risk management and speculation. They derive their value from an underlying asset and involve contracts between two parties. However, OTC derivatives are traded directly between counterparties, while exchange-traded futures are traded on organized exchanges.\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003cdiv class=\u0022elementor-accordion-item\u0022\u003e\u003cdiv id=\u0022elementor-tab-title-1832\u0022 class=\u0022elementor-tab-title\u0022 data-tab=\u00222\u0022 role=\u0022button\u0022 aria-controls=\u0022elementor-tab-content-1832\u0022 aria-expanded=\u0022false\u0022\u003e\u003cspan class=\u0022elementor-accordion-icon elementor-accordion-icon-left\u0022 aria-hidden=\u0022true\u0022\u003e\u003cspan class=\u0022elementor-accordion-icon-closed\u0022\u003e\u003ci class=\u0022fas fa-plus\u0022\u003e\u003c/i\u003e\u003c/span\u003e\u003cspan class=\u0022elementor-accordion-icon-opened\u0022\u003e\u003ci class=\u0022fas fa-minus\u0022\u003e\u003c/i\u003e\u003c/span\u003e\u003c/span\u003e\u003ca class=\u0022elementor-accordion-title\u0022 tabindex=\u00220\u0022\u003eAre futures contracts OTC derivatives?\u003c/a\u003e\u003c/div\u003e\u003cdiv id=\u0022elementor-tab-content-1832\u0022 class=\u0022elementor-tab-content elementor-clearfix\u0022 data-tab=\u00222\u0022 role=\u0022region\u0022 aria-labelledby=\u0022elementor-tab-title-1832\u0022\u003e\u003cp\u003eNo, futures contracts are not considered OTC derivatives. Unlike OTC derivatives, futures contracts are traded on organized exchanges, with standardized terms and clearing mechanisms. OTC derivatives, on the other hand, are traded directly between counterparties, allowing for greater customization and flexibility.\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003cdiv class=\u0022elementor-accordion-item\u0022\u003e\u003cdiv id=\u0022elementor-tab-title-1833\u0022 class=\u0022elementor-tab-title\u0022 data-tab=\u00223\u0022 role=\u0022button\u0022 aria-controls=\u0022elementor-tab-content-1833\u0022 aria-expanded=\u0022false\u0022\u003e\u003cspan class=\u0022elementor-accordion-icon elementor-accordion-icon-left\u0022 aria-hidden=\u0022true\u0022\u003e\u003cspan class=\u0022elementor-accordion-icon-closed\u0022\u003e\u003ci class=\u0022fas fa-plus\u0022\u003e\u003c/i\u003e\u003c/span\u003e\u003cspan class=\u0022elementor-accordion-icon-opened\u0022\u003e\u003ci class=\u0022fas fa-minus\u0022\u003e\u003c/i\u003e\u003c/span\u003e\u003c/span\u003e\u003ca class=\u0022elementor-accordion-title\u0022 tabindex=\u00220\u0022\u003eIs mark-to-market margins applicable to OTC options?\u003c/a\u003e\u003c/div\u003e\u003cdiv id=\u0022elementor-tab-content-1833\u0022 class=\u0022elementor-tab-content elementor-clearfix\u0022 data-tab=\u00223\u0022 role=\u0022region\u0022 aria-labelledby=\u0022elementor-tab-title-1833\u0022\u003e\u003cp\u003eMark-to-market margins are typically not applicable to OTC options. OTC options are customized contracts traded directly between counterparties, and the margin requirements may vary based on the agreement between the parties. However, exchange-traded options may have mark-to-market margin requirements set by the exchange.\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003cdiv class=\u0022elementor-accordion-item\u0022\u003e\u003cdiv id=\u0022elementor-tab-title-1834\u0022 class=\u0022elementor-tab-title\u0022 data-tab=\u00224\u0022 role=\u0022button\u0022 aria-controls=\u0022elementor-tab-content-1834\u0022 aria-expanded=\u0022false\u0022\u003e\u003cspan class=\u0022elementor-accordion-icon elementor-accordion-icon-left\u0022 aria-hidden=\u0022true\u0022\u003e\u003cspan class=\u0022elementor-accordion-icon-closed\u0022\u003e\u003ci class=\u0022fas fa-plus\u0022\u003e\u003c/i\u003e\u003c/span\u003e\u003cspan class=\u0022elementor-accordion-icon-opened\u0022\u003e\u003ci class=\u0022fas fa-minus\u0022\u003e\u003c/i\u003e\u003c/span\u003e\u003c/span\u003e\u003ca class=\u0022elementor-accordion-title\u0022 tabindex=\u00220\u0022\u003eAre OTC derivatives risky?\u003c/a\u003e\u003c/div\u003e\u003cdiv id=\u0022elementor-tab-content-1834\u0022 class=\u0022elementor-tab-content elementor-clearfix\u0022 data-tab=\u00224\u0022 role=\u0022region\u0022 aria-labelledby=\u0022elementor-tab-title-1834\u0022\u003e\u003cp\u003eOTC derivatives can be risky, primarily due to counterparty risk and the complexity of these instruments. Counterparty risk arises from the potential default or financial instability of the parties involved in the contract. Additionally, the complexity of OTC derivatives requires a deep understanding of the underlying assets and market dynamics. Proper risk management and due diligence are essential when dealing with OTC derivatives.\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003c/div\u003e","protected":false},"excerpt":{"rendered":"\u003cp\u003eIntroduction Over the counter derivative are traded between two parties without going through an exchange or any other intermediaries. It refers to stocks that trade via dealer network and not any centralized exchange. These are known as unlisted stocks where the trading is carried out through by broker-dealers. What are the over the counter derivative … \u003ca title=\u0022OTC Derivatives: Meaning, Types, Advantages \u0026#038; Risk\u0022 class=\u0022read-more\u0022 href=\u0022https://www.5paisa.com/hindi/finschool/what-are-over-the-counter-otc-derivatives/\u0022 aria-label=\u0022Read more about OTC Derivatives: Meaning, Types, Advantages \u0026#038; Risk\u0022\u003eRead more\u003c/a\u003e\u003c/p\u003e","protected":false},"author":1,"featured_media":34649,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18,73],"tags":[],"class_list":["post-34644","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blogs","category-know-everything-about-starting-trading"],"acf":[],"_links":{"self":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/posts/34644","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/posts"}],"about":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/types/post"}],"author":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/users/1"}],"replies":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/comments?post=34644"}],"version-history":[{"count":18,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/posts/34644/revisions"}],"predecessor-version":[{"id":73201,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/posts/34644/revisions/73201"}],"wp:featuredmedia":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/media/34649"}],"wp:attachment":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/media?parent=34644"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/categories?post=34644"},{"taxonomy":"post_tag","embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/tags?post=34644"}],"curies":[{"name":"wp","href":"https://api.w.org/{rel}","templated":true}]}}