OTC Derivatives

OTC (over-the-counter) derivatives are financial contracts negotiated directly between two parties outside of formal exchanges. They are used to manage risk or speculate on the price movements of assets like currencies, commodities, or interest rates. Because they are customized and traded privately, OTC derivatives offer flexibility but also carry higher counterparty risk—meaning one party might not fulfill its obligations. Examples include swaps, options, and forward contracts. Overall, OTC derivatives are tools for sophisticated investors or institutions to hedge against financial uncertainties or amplify potential gains.