Explain exotic or over-the-counter contracts
Explain exotic or over-the-counter (OTC) contracts.
Expert
These are not traded actively; they may be unique to you and your counterparty. These instruments need to be marked to model. And this clearly raises the question of that model to use. Generally in this context the ‘model’ implies the volatility, whether in FX or fixed income and equity markets.
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Presently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The interest rate of three month is equal to 8.0% per annum in the U.S. & 5.8% per annum in the U.K. One can borrow as much as $1,500,000 o
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