( See how your broker compares to Investopedia list of the finest online brokers). Melissa Ling Copyright Investopedia, 2019. Derivatives can trade over the counter (OTC) or on an exchange. OTC derivatives make up a higher proportion of the derivatives market. OTC-traded derivatives, usually have a higher possibility of counterparty risk. Counterparty threat is the danger that one of the parties associated with the deal might default.

Conversely, derivatives that are exchange-traded are standardized and more heavily managed. Derivatives can be used to hedge a position, hypothesize on the directional movement of a hidden asset, or provide take advantage of to holdings. Their value originates from the variations of the worths of the underlying possession. Originally, derivatives were utilized to guarantee well balanced exchange rates for products traded worldwide.

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