Exchange-Traded Derivatives Markets
Derivative instruments are created and traded either on an exchange or on the OTC market. Exchange-traded derivatives are standardized, whereas OTC derivatives are customized. To standardize a derivative contract means that its terms and conditions are precisely specified by the exchange and there is very limited ability to alter those terms. For example, an exchange might offer trading in certain types of derivatives that expire only on the third Friday of March, June, September, and December. If a party wanted the derivative to expire on any other day, it would not be able to trade such a derivative on that exchange, nor would it be able to persuade the exchange to create it, at least not in the short run. If a party wanted a derivative on a particular entity, such as a specific stock, that party could trade it on that exchange only if the exchange had specified that such a derivative could trade. Even the magnitudes of the contracts are specified. If a party wanted a derivative to cover €150,000 and the exchange specified that contracts could trade only in increments of €100,000, the party could do nothing about it if it wanted to trade that derivative on that exchange.
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