Lesson 1,
Topic 1
In Progress
Exchange-Traded Derivatives (ETD):
- Operations: Exchange-traded derivatives are traded on organized exchanges, such as futures exchanges or options exchanges. These exchanges act as intermediaries, facilitating the trading of standardized derivative contracts.
- Advantages:
- Standardization: ETDs have standardized contracts with pre-determined contract specifications, including contract size, maturity, underlying assets, and tick sizes. This provides transparency, ease of trading, and liquidity.
- Counterparty Risk: The exchange acts as the central counterparty, ensuring the performance of contracts and reducing counterparty risk. This enhances market integrity and reduces the risk of default.
- Liquidity: ETDs often have higher liquidity due to the participation of multiple market participants, including market makers, speculators, hedgers, and institutional investors.
- Disadvantages:
- Limited Customization: The standardized nature of ETDs means there is limited flexibility to customize contracts to meet specific needs. This may be a drawback for market participants requiring tailor-made agreements.
- Higher Costs: Trading ETDs typically involves transaction costs, such as exchange fees, brokerage fees, and clearing fees. These costs can be higher compared to OTC derivatives.
- Less Privacy: Exchange-traded transactions are usually publicly disclosed, which may affect the privacy of participants’ trading strategies.