Which derivatives are OTC?

Which derivatives are OTC?

• A. Futures
• B. Swaps and forwards and some options (usually options with more bespoke terms)
• C. Exchange-traded derivatives
• D. Physical markets

Answer: (B)

Over-the-counter derivatives are contracts negotiated directly between two parties outside of a formal exchange. They’re typically customized to fit specific needs, which is why swaps, forwards, and some options with bespoke terms fit this category. Futures, by contrast, are standardized contracts traded on organized exchanges and cleared through a central counterparty, so they’re not OTC. Exchange-traded derivatives are those standardized contracts traded on exchanges, not OTC. Physical markets refer to spot trading in the underlying asset and are not derivatives at all.

Over-the-counter derivatives are contracts negotiated directly between two parties outside of a formal exchange. They’re typically customized to fit specific needs, which is why swaps, forwards, and some options with bespoke terms fit this category. Futures, by contrast, are standardized contracts traded on organized exchanges and cleared through a central counterparty, so they’re not OTC. Exchange-traded derivatives are those standardized contracts traded on exchanges, not OTC. Physical markets refer to spot trading in the underlying asset and are not derivatives at all.