OTC (Over the Counter) Currency options are defined as bilateral contracts, the value of which is derived from the value of some underlying asset or security. A Derivative covers any transaction where there is no movement of principle, and where the price performance of the derivative itself is driven by the price of the underlying asset.
It is especially this aspect (the no movement of principle) that makes Derivatives such useful instruments to hedge other exposures and to do specialized risk management.
Foreign exchange derivatives are the following: Currency Options Forex Futures Swaps and Forwards
Foreign Exchange derivatives can be traded over the counter or on organized exchanges On organized exchanges fixed and prescribed contracts are bought and sold. An OTC derivative instrument is tailored to customers specifications regarding the specific dates, currencies and total amounts involved.
One of the main differences between exchange traded currency derivatives and OTC currency derivatives is the credit risk. In the OTC Market each party takes on the risk of the other party – On an exchange, the exchanges clearinghouse covers the...
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