A hedge must match the exposure and remain affordable to trade and fund. Exchange and over-the-counter (OTC) contracts offer different combinations of standard terms, flexibility and liquidity. This lesson compares those choices and separates agreement of the trade from management of its obligations. Market participants and margin and collateral explain who performs those jobs and what resources they require.
Learning objectives. By the end of this note you should be able to:
- distinguish execution venue from clearing arrangement;
- compare exchange standardisation with OTC customisation;
- explain bilateral and centrally cleared OTC trades;
- choose a plausible venue for a simple hedging need.
In this lesson
- Exchange-traded markets
- Over-the-counter markets
- Choose by the mismatch that matters
- Execution and clearing are separate choices
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
Read the full lessonNew to SelfMadeQuant.com? See membership options or browse the Finance Primer syllabus.