Understanding Credit Risk Profiles of Over-the-Counter Derivative Transactions

There are two types of financial derivative transactions, namely exchange-traded and over-the- counter (OTC) derivative transactions. Exchange-traded transactions are executed on exchanges where an exchange will be one of the counterparties for every transaction and guarantees the payment as per the contract. OTC transactions are executed by two parties outside exchange.

Exchange-traded transactions are standardized contracts, whereas the OTC transactions can be customized as per convenience

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