Describe the difference between the over counter derivatives and standardized traded derivatives?

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Financial instruments called derivatives derive their value and income from the underlying assets like stocks, bonds and commodities. While OTC derivatives can only be created between two individuals in private negotiations, standardized traded derivatives or STD are clearly defined products that trade on organized exchanges.

OTC and STD derivatives differ in that they carry different levels of risk. OTC derivatives are more risky due to lack of oversight or market regulation, whereas STD derivatives can have more rigid regulations to help mitigate certain risks. OTC contracts, being privately negotiated, allow both the parties more control over which features and conditions are included, however, there could be more disputes.

Cost is another important difference between OTC derivatives and STD derivatives. OTC contracts are more expensive due to the additional legal fees associated with drafting and higher transaction costs than standardized products, whose prices follow predictable patterns that depend on demand and supply. Ultimately, it’s important for investors to consider all aspects before deciding which type of derivative best suits their needs.

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