( See how your broker compares with Investopedia list of the best online brokers). Melissa Ling Copyright Investopedia, 2019. Derivatives can trade non-prescription (OTC) or on an exchange. OTC derivatives make up a higher proportion of the derivatives market. OTC-traded derivatives, generally have a greater possibility of counterparty risk. Counterparty risk is the danger that one of the parties associated with the transaction may default.

Conversely, derivatives that are exchange-traded are standardized and more heavily controlled. Derivatives can be used to hedge a position, speculate on the directional motion of an underlying property, or give take advantage of to holdings. Their value originates from the changes of the worths of the hidden asset. Initially, derivatives were utilized to make sure balanced currency exchange rate for items traded internationally.

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