Chapter 01 · Section 1.1

Guarantee

                       OTC OPTIONS      EXCHANGE-TRADED OPTIONS
 

Contract Terms          negotiated         standard
Delivery                perhaps 50%        less than 10%
Trading                 by arrangement     centralized
Credit Risk             .........          clearing house
Liquidity               .........          generally high
Margin calls            .........          minimum margin regulated

An OTC options contract is guaranteed:

a) by the counterpart, through a bank guarantee.
• b) by no one. The parties assume all credit risks.
  Yes. Since the parties are dealing with each other on a one-to-one basis, they also assume the risk if the other party is unable to fulfill his/her obligation. (However, the individual writer is usually required to deposit collateral.) Continue
  c) by the exchange clearing house.

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