Standardization of derivative contracts:
A) results in increased risk for the parties involved.
B) makes them more difficult to understand and therefore leads to increased misuse.
C) makes the premiums involved with these contracts increase.
D) leads to greater liquidity and lower risk.

Question

Quizplus · Accepted Answer

Standardization of derivative contracts leads to greater liquidity and therefore lower risk as standardized contracts can be easily bought and sold in the market, increasing the number of counterparties available. It also helps to provide more transparency and reduces the potential for misunderstanding and manipulation. Increased premiums are not necessarily a result of standardization.

Standardization of Derivative Contracts