Over-the-Counter Options (OTC)

These options differ from exchange options in that they are significantly more flexible, being a private agreement between the grantor, or writer, and the buyer, each acting as a principal. The buyer indicates his exact requirements on strike price, expiry date and quantity; the grantor then quotes a premium. In effect it is a tailor-made option agreement and, unlike an exchange option, it is not a tradeable instrument, though the holder may trade against his/her options position. Since everything is confidential, no details of volume are given and the true size and scope of the OTC market is not known, though it is estimated to exceed exchange options. Between ten and fifteen international banks and bullion dealers offer OTC options, which will reflect the client base of each institution. Some will handle more business with mining companies hedging their production, others will work with central banks who have found that options can provide a useful way of making some return on gold reserves. All the main dealers in London, New York and Zurich offer OTC options.