What are the major differences between various types of derivatives?
Two major differences between futures and options on futures, in contrast to swaps and swaptions, are that the former are traded on exchanges. As a result, the financial integrity of futures contracts is guaranteed by a clearinghouse that collects and distributes margin payments every business day. Swaps and swaptions are traded in an over-the-counter dealers’ market–for the most part involving commercial and investment banks, commercial enterprises and institutional investors. While the OTC market operates without a clearinghouse and generally without daily margin payments, the principal dealers in these markets are among the largest financial institutions in the world. These firms generally are well capitalized and experienced in assessing the creditworthiness of counterparties transacting in the OTC market. Another difference is that the terms and conditions of exchange-traded futures and options on futures contracts–such as their size, quality or grade, and trading months–genera
