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

Financial instruments such as derivatives derive their values from assets like stocks, bonds and commodities. OTC derivatives are private contracts between two parties, while STD derivatives are products that are traded in organized exchanges.

The level of risk is one of the major differences between the two derivative types. OTC derivatives are more risky due to the absence of regulation, while STD derivatives can benefit from stricter regulations that help mitigate certain risks. OTC agreements are negotiated privately, which gives both parties more flexibility to choose the specific terms and conditions that will be in their contract.

Cost is another important difference between OTC derivatives and STD derivatives. OTC contracts are typically more expensive due to the additional costs associated with drafting a contract as well as increased transaction costs, compared to standard products. Standardized products tend to have predictable prices based on demand and supply. Ultimately, it’s important for investors to consider all aspects before deciding which type of derivative best suits their needs.