What is the purpose of the clearing house in exchange-traded derivatives?

What is the purpose of the clearing house in exchange-traded derivatives?

• A. To offer loans to investors
• B. To remove trading risks for investors
• C. To create new financial products
• D. To manage stock listings

Answer: (B)

The purpose of the clearing house in exchange-traded derivatives is to remove trading risks for investors. A clearing house acts as an intermediary between the buyer and seller in a trade, ensuring that both parties fulfill their obligations. By guaranteeing the trade, the clearing house reduces the counterparty risk—that is, the risk that one party will default on the contract. This mechanism enhances the stability and confidence in trading derivatives, as investors can engage in transactions knowing that the clearing house has measures in place to settle these agreements, even in the face of defaults or market fluctuations. In essence, the clearing house provides a layer of security and efficiency in the derivatives market, which is essential for its smooth functioning and for maintaining investor trust. The other options do not align with the primary role of a clearing house in this context; thus, they do not accurately represent its main function.

The purpose of the clearing house in exchange-traded derivatives is to remove trading risks for investors. A clearing house acts as an intermediary between the buyer and seller in a trade, ensuring that both parties fulfill their obligations. By guaranteeing the trade, the clearing house reduces the counterparty risk—that is, the risk that one party will default on the contract. This mechanism enhances the stability and confidence in trading derivatives, as investors can engage in transactions knowing that the clearing house has measures in place to settle these agreements, even in the face of defaults or market fluctuations.

In essence, the clearing house provides a layer of security and efficiency in the derivatives market, which is essential for its smooth functioning and for maintaining investor trust. The other options do not align with the primary role of a clearing house in this context; thus, they do not accurately represent its main function.