Canadian Securities Course (CSC) Level 1 Practice Exam

Are Exchange-traded Derivatives or OTC derivatives more likely to deliver the underlying assets?

1. OTC Derivatives.

2. Energy Products.

3. Exchange-traded Derivatives.

4. Equities.

The correct answer is: OTC Derivatives.

The correct choice here is Exchange-traded Derivatives. These financial instruments are standardized contracts traded on regulated exchanges, which often necessitate the delivery of the underlying assets upon contract expiration, especially for futures contracts. The exchanges have strict rules governing these contracts, and the participants are typically required to settle their positions either by cash or by the delivery of the actual asset. In contrast, OTC (Over-the-Counter) derivatives are usually more customized and negotiated directly between parties, which might lead to cash settlement instead of physical delivery. The OTC market is less regulated, and there is often more flexibility regarding how contracts are settled. As a result, OTC derivatives are generally less likely to result in the delivery of the underlying assets. Understanding the nature of these products is crucial, as it directly impacts trading strategies, risk management, and the regulatory environment in which these derivatives operate.