What are over-the-counter derivatives?

Over-the-counter (OTC) derivatives are financial instruments that are traded directly between two parties, rather than on a regulated exchange. OTC derivatives are commonly used to hedge risk or to speculate on the future movements of an underlying asset, such as a currency, interest rate or commodity. One type of OTC derivative is a contract for difference (CFD), which allows traders to speculate on the price movements of an underlying asset without actually owning the asset.

Unlike exchange-traded derivatives, which are standardised and traded on a regulated exchange, OTC derivatives are customised to meet the specific needs of the parties involved. This means that the terms and conditions of the contract are negotiated between the two parties, rather than being predetermined by the exchange.

One of the main advantages of OTC derivatives is that they provide flexibility and customisation for parties looking to hedge risk or speculate on the future movements of an underlying asset. This can be especially useful for businesses that need to manage their exposure to certain risks, such as changes in interest rates or currency fluctuations.

However, OTC derivatives also have some drawbacks. Because they are traded directly between two parties, they are not subject to the same level of regulation as exchange-traded derivatives. This can make them more risky, as there is no central clearinghouse to guarantee the performance of the contract. Additionally, because the terms and conditions are negotiated directly between the parties involved, there is a greater potential for disputes and disagreements.

Overall, OTC derivatives, including CFDs, can be a useful tool for managing risk or speculating on the future movements of an underlying asset. However, they come with additional risks and should be carefully considered before entering into a contract.

“The best traders aren’t afraid. They aren’t afraid because they have developed attitudes that give them the greatest degree of mental flexibility to flow in and out of trades, based on what the market is telling them about the possibilities from its perspective. At the same time, the best traders have developed attitudes that prevent them from getting reckless.” – Mark Douglas

sc name=”fma-cta”]
Hi . Please set your update preferences (Optional. Default = all)

BLOOMBERG GLOBAL NEWS

Bloomberg video news feed with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

RBA ECONOMIC UPDATES

Periodic updates on the Australian economy, direct from the RBA, with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

US FEDERAL RESERVE UPDATES

Bloomberg News focussed upon the Federal Reserve, with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

FX/GLOBAL BRIEFS

Brief global updates with a focus upon currencies, with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

ASX MARKET UPDATES

ASX-focussed updates, with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

BLOOMBERG BRIEFS

Global briefs from Bloomberg with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED