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Over the Counter Interest Rate Options
By Richhild Moessner
This paper provides a survey of the structure and use of the over the counter options market, focussing on interest rate options. It is based in part on interviews with eight market makers and one broker from the OTC interest rate options market in London.
Options provide information about the uncertainty and probability distribution of market participants' expectations for various asset prices. A wider range of products are traded in OTC interest rate options markets than on exchanges, including options of much longer times to expiry, many kinds of exotic options and structured products. OTC interest rate options markets may therefore contain additional information to that available from exchange traded products about the probability distribution of interest rate expectations. The OTC market is also interesting to study since it has grown rapidly, and less information is publicly available about it than for exchange-traded options. And, a better understanding of OTC derivatives markets is likely to be useful for monitoring risks to financial stability.
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