Syllabus E. Treasury And Advanced Risk Management Techniques E1. The role of the treasury function in multinationals

E1b. Exchange and OTC 3 / 5

Syllabus E1b)

b) Discuss the operations of the derivatives market, including:

i) The relative advantages and disadvantages of exchange traded versus OTC agreements

Exchange and over the counter (OTC) markets

Secondary markets can be organised as exchanges or (OTC) markets

Exchanges - where buyers and sellers of securities buy and sell securities in one location 

Examples of exchanges include:

  1. the london Stock Exchange and the New York Stock Exchange for the trading of shares

  2. the Chicago Board of Trade for the trading of commodities

  3. the London International Financial Futures and Options Exchange (LIFFE) for the trading of derivatives.

Over the counter (OTC) markets

-  where buyers and sellers transact with each other not through an exchange but by individual negotiation.

The prices at which securities are bought over the counter may be the same as the corresponding transactions in an exchange, because the buyers and sellers agree the most competitive price based on constant contact through computers with other market participants. 

Securities that are issued in an over the counter market can be negotiable or non-negotiable.

  • Negotiable securities can be resold.

  • Non-negotiable securities cannot be resold.