Types of derivative market.

Derivatives.

In the modern world, there is a huge variety of derivative products available. They are either traded on organised exchanges (called exchange traded derivatives) or agreed directly between the contracting counterparties over the telephone or through electronic media (called Over‐the‐counter (OTC) derivatives).

Few complex products are constructed on simple building blocks like forwards, futures, options and swaps to cater to the specific requirements of customers. Over‐the‐counter market is not a physical marketplace but a collection of broker‐dealers scattered across the country. Main idea of the market is more a way of doing business than a place. Buying and selling of contracts is matched through negotiated bidding process over a network of telephone or electronic media that link thousands of intermediaries.

OTC derivative markets have witnessed a substantial growth over the past few years, very much contributed by the recent developments in information technology. The OTC derivative markets have banks, financial institutions and sophisticated market participants like hedge funds, corporations and high net‐worth individuals. OTC derivative market is less regulated market because these transactions occur in private among qualified counterparties, who are supposed to be capable enough to take care of themselves.

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The analogy I have used might not be 100% correct but it’s easy to understand things with a simpler analogy.

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