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What about exotic or over-the-counter (OTC) contracts

What about exotic or over-the-counter (OTC) contracts?

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Exotic or over-the-counter (OTC) contracts are not traded actively; they may be exceptional to you and your counterparty. These instruments should be marked to model. And it obviously 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. So the question about that model to use becomes a question about that volatility to use. Along with credit instruments the model frequently boils down to a number for risk of default.

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