over-the-counter derivatives (otc)
Over-the-counter derivatives (OTC derivatives) are financial contracts —such as forwards, swaps and options— that are traded through a dealer network rather than through a centralised exchange. The lack of an exchange that guarantees all trades means that the parties to an OTC transaction are exposed to counterparty risk.
While currency forward contracts are ‘over-the-counter’, futures contracts are ‘exchange-based’. Most companies, when hedging their FX exposure, rarely choose futures contracts. Instead, they rely on over-the-counter forward contracts, which are used in Currency Management Automation solutions.