Counterparty risk - Option

[FrankCFA]

Is the exchaged-traded option normal (liquidity is good)?
Thinking if we can switch the OTC option to exchanged-traded option to reduce the counterparty risk. Thanks.

 

[jmsp]

Exchange-traded reduces counterparty risk but because it’s standardized, you might not find exact contract you want (thus liquidity is pointless at this point) which is why OTC is popular and much bigger than exchange market.
Speaking of counterparty risk, it’s potentially possible that the clearinghouse defaults (although I don’t think it’s ever happened). For the exam, can we assume that exchange-traded actually eliminates CP risk? Or is that not technically correct because it can still happen. I can see this type of question in the exam

 

[S2000magician]

jmsp wrote:Exchange-traded reduces counterparty risk but because it’s standardized the clearinghouse is your counterparty.

Fixed that for you.

 

[jmsp]

thanks s2000 but my point about it being standardized was that it may lead to not being able to find the contract with exact terms you want, hence the “but” in my response.
Do you think, for the exam, it’s safe to assume that CP risk is eliminated with exchange-traded or just simply reduced.

 

[S2000magician]

My error; I missed the “but”.
Yes, I’d say eliminated.