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Answer: EUR2million
B is correct. In the trade compression, only contracts on the same reference credit can be compressed. The bank has a long position of EUR 9 million and a short position of EUR 7 million on NUMU Inc. as the reference credit. The long position with Digital Corporation on WKL Company as reference credit is not considered in the compression. Therefore, the net contract notional value after compression is the long position minus the short position, which equals EUR 2 million (Long 9,000,000 + Short 7,000,000 = Long 2,000,000). The other options are incorrect as they either incorrectly state the net position or consider netting trades that should not be compressed together.
Author: LeetQuiz Editorial Team
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The head of the structured securities division at an investment firm has directed all derivative traders to utilize trade compression techniques for eligible trades to reduce counterparty risk. An analyst decides to employ trade compression on a set of single-name Credit Default Swap (CDS) agreements that share identical expiration dates and involve two different counterparties. The details of these trades are presented in the table below. Calculate the reduced notional value for the investment firm after applying trade compression:
Reference | Position | Notional | Bank's | Coupon | Counterparty | Credit Entity | (in EUR million) | (bps) | protection --------- | -----------| ----------- | ------------- | ------------ | ------------ Digital | NUMU Inc. | 9 | Long | 180 | Corporation WKL | Company | 6 | Long | 150 | Corporation WKL | Company | 7 | Short | 150 | NUMU Inc.
What is the net notional value of the investment firm's contracts after applying trade compression?
A
EUR 1 million
B
EUR2million
C
EUR8million
D
EUR 15million