( See how your broker compares with Investopedia list of the best online brokers). Melissa Ling Copyright Investopedia, 2019. Derivatives can trade over-the-counter (OTC) or on an exchange. OTC derivatives constitute a higher percentage of the derivatives market. OTC-traded derivatives, usually have a greater possibility of counterparty threat. Counterparty threat is the risk that a person of the celebrations associated with the deal might default.

Alternatively, derivatives that are exchange-traded are standardized and more heavily managed. Derivatives can be utilized to hedge a position, hypothesize on the directional movement of an underlying property, or provide leverage to holdings. Their value originates from the changes of the values of the hidden possession. Originally, derivatives were utilized to make sure well balanced currency exchange rate for goods traded worldwide.

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