What is a common use for derivatives traded over-the-counter (OTC)?

Derivatives traded over-the-counter (OTC) are primarily used for customized risk management solutions. One of the defining characteristics of OTC derivatives is their flexibility; they can be tailored to meet the specific needs of the parties involved. This customization allows entities to hedge against particular risks, such as interest rate fluctuations or currency exchange rate movements, in a way that is not possible with standardized exchange-traded derivatives.

For example, a company might use an OTC swap to lock in interest rates on a loan that is specifically aligned with their cash flow needs. Similarly, corporations can hedge their foreign exchange risk in a way that precisely matches their anticipated cash flows from international transactions. This tailored approach is what makes OTC derivatives particularly valuable for sophisticated investors and corporations looking to effectively manage their unique risk profiles.

The other choices focus on aspects that are either inaccurate for OTC derivatives or do not capture their primary function effectively. Standardized trading across exchanges relates more to exchange-traded derivatives, while public disclosure of transactions is generally more associated with exchange-traded products. Additionally, the notion that OTC derivatives are limited to investing in commodities overlooks their broader application across various asset classes, including interest rates, equities, and currencies.