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.
• c) by the exchange clearing house.
  No. OTC options are not traded on an exchange. Therefore there would be no reason for an exchange to guarantee performance of the contract.

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