Which of the following statements regarding exchange-traded and over-the-counter (OTC) financial instruments is correct?
A. There is greater liquidity with exchange-traded financial instruments.
B. There is greater customization with exchange-traded financial instruments.
C. There is greater price transparency with OTC financial instruments.
D. There is credit risk by either of the counterparties inherent in exchange-traded instruments.
Answer:A
Exchange-traded instruments cover only certain underlying assets and are quite standardized in order to promote liquidity in the marketplace. As a result, there is less customization with exchange-traded instruments. OTC financial instruments, in exchange for greater customization, are less liquid and more difficult to price compared to exchange-traded instruments. In addition, there is credit risk by either of the counterparties that would generally not exist with exchange-traded instruments.