• Exchange Traded Derivatives

    Exchange Traded derivatives (ETD) are kind of derivatives products that are traded via an approved exchange or an intermediary to hedge credit, counterparty and other risks. A derivatives exchange acts as an intermediary to all related transactions, and in turns takes margin deposit from both the buyers and sellers to mitigate credit risk.

    For ETD, all the important parameters like expiry dates, amounts, lots, confirmation details, procedures, margin amount calculation processes are specified by the Exchanges as pre standard norms.

    In this type of trading, Exchange works as a central counterparty and plays a role of buyer for a seller and role of seller for a buyer. These standardized terms can be of various types:

    • Unit of trading
    • Effective date
    • Settlement Date
    • Maturity
    • Quotation
    • Strike Price
    • Price
    • Maturity of the contract

    Examples include: Futures contracts and Options contracts.

    • Futures Contracts – A futures contract is traded on a futures exchange with all standard contract details like an Forward agreement. Also a margin amount is deposited by both buyers and sellers in order to mitigate credit risk. For details: http://crackmba.com/futures/ and http://crackmba.com/finance-wiki/derivatives/
    • Options Contracts – An option is a derivatives contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price at a pre-agreed specified date (for European Option) or any date before Expiry (American Option). Options contracts are also standard contracts with all the required details. For details: http://crackmba.com/options/ and http://crackmba.com/finance-wiki/derivatives/

    Advantages of Exchange Traded Derivatives over OTC derivatives:

    • ETD are standard contracts compared to OTC derivatives
    • ETD provides higher liquidity than OTC derivatives where buyer has to search for a seller
    • ETDs eliminate default or credit risk as Exchanges take necessary margin deposit for the same

     

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