How Does the Lack of Standardization in OTC Markets Affect the Pricing of American-Style Options?
The lack of standardization means that pricing models must be tailored to the unique, bespoke terms of each contract, making pricing more complex and subjective. Factors like counterparty credit risk, collateral terms, and specific exercise conditions must be incorporated, leading to greater price variance and a reliance on advanced quantitative models.
Glossar
Otc Markets
Market ⎊ The segment of the cryptocurrency ecosystem where trading occurs directly between two principals without the use of a centralized exchange order book, often involving bilateral agreements for customized derivatives.
Lack of Standardization
Framework ⎊ The absence of uniform protocols and specifications across cryptocurrency exchanges, options trading platforms, and financial derivatives markets represents a significant impediment to efficient capital allocation and systemic stability.
Standardization
Convergence ⎊ Standardization within cryptocurrency, options trading, and financial derivatives represents a process of reducing variability in contract specifications, valuation methodologies, and post-trade processing, ultimately enhancing market efficiency and interoperability.
Counterparty Credit Risk
Exposure ⎊ Counterparty credit risk in cryptocurrency derivatives arises from the potential for a participant to default on contractual obligations, impacting net market value.