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.