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PRMIA Exam 8006 Topic 7 Question 31 Discussion
Topic #: 7
Which of the following statements is true:
1. The OTC market for foreign exchange is much larger than the exchange traded futures market for foreign currencies
II. DVP arrangements help avoid the risk of counterparty defaults on settlements
III. Exchanges offer the advantage of lower trading costs than ECNs
IV. ISDA master agreements form the basis of a large number of OTC derivative trades
The OTC market for foreign exchange is indeed much larger than the exchange traded futures market for FX. Therefore statement I is correct.
Delivery-versus-payment (DVP) arrangements make sure that title to a security passes only when payment has been made, and these arrangements, usually implemented through national clearing agencies such as the DTC in the US, help avoid the risk of counterparty defaults.
Electronic Clearing Networks (ECNs) offer cheaper trading costs than exchanges, in fact that is their primary attraction. Exchanges offer other advantages, but lower trading costs is not one of them.
ISDA master agreements provide templates that a large number of OTC market participants use to standardize their OTC trading activities. Therefore statement IV is correct.
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