Customized contract terms are a feature of OTC derivatives. Unlike exchange-traded systems, where settlement is guaranteed by a clearing house, OTC derivatives are subject to credit risk. Each party bears the risk of default by the other party. Both exchange-traded derivatives and OTC derivatives serve the same risk management purpose.

An operationally efficient market is a liquid market where trading commissions, bid-ask spreads, and order price impact costs are low.

A is incorrect because an economy that allocates capital (money) to its most productive use (i.e., the project with the highest net present value or internal rate of return) is known as an allocatively efficient economy.

B is incorrect because a market in which security prices reflect fundamental values is known as an informationally efficient market.

Convertible debt is a fixed income security. Asset-backed securities and hedge funds, on the other hand, are pooled investment vehicles.

Pooled investments include mutual funds, trusts, exchange-traded funds (ETFs) and hedge funds. They issue securities to represent common ownership of assets. Funds from multiple investors are pooled together and managed by specialized money managers according to a specific investment strategy.