Financial Risk Manager Part 2
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Which of the following statements accurately describes the agreement between a financial institution and its counterparty, with respect to their two-way Credit Support Annex (CSA) for a portfolio valued at JPY 400 million? The terms of the agreement include a threshold of JPY 180 million, a minimum transfer amount of JPY 30 million, and a margin period of risk set at 10 days.
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A
A lower threshold value implies that a larger portion of exposure is protected by collateral.
B
A shorter margin period of risk implies that a smaller portion of exposure is protected by collateral.
C
A lower independent amount implies that a larger portion of exposure is protected by collateral.
D
The protection from collateral specified in the CSA is uniform throughout the life of the exposure profile.
Explanation:
A is correct. Threshold is the amount of uncollateralized exposure. A lower threshold value means a larger portion of exposure is protected by collateral. In contrast, C is incorrect because a lower independent amount means a smaller initial margin is posted. B is incorrect because the margin period of risk is the effective time assumed between a collateral call and receiving the appropriate collateral. Exposure may increase or decrease during this period. D is incorrect. Collateral has little effect at both the beginning and the end of the exposure profile when the exposure is relatively small.
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