University of Central Florida (UCF) FIN4243 Debt and Money Markets Practice Exam 3

Swaps are primarily traded through over-the-counter (OTC) trading. This means that they are negotiated directly between parties rather than through a formal exchange. The OTC market allows for greater customization of swap agreements, enabling parties to tailor terms such as duration, notional amount, and interest rates based on their specific needs and preferences.

This market structure is particularly important for swaps since they often involve complex financial instruments that benefit from direct negotiation. Participants in the OTC market include banks, financial institutions, and corporate entities looking to manage their exposure to various risks, such as interest rate fluctuations or currency movements.

While other trading avenues like stock exchanges or regulated futures exchanges may have certain derivatives or financial instruments, swaps are distinctly suited to the OTC environment where the agreements can be more flexible and specific to the involved parties' situations. This allows for a more effective hedging strategy or speculative opportunity tailored to individual needs, which is a hallmark of swaps trading.