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Financial Risk Manager Part 2

Financial Risk Manager Part 2

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A medium-sized investment firm, involved in multiple trades, uses netting agreements to mitigate risk. Currently, it has such agreements for 8 equity trade positions with an average correlation coefficient of 0.28. The firm's primary goal is to amplify the diversification benefits that netting provides by revising the existing agreement. Assuming that the values of future trade positions are normally distributed, which of the following trade combinations would result in the most significant increase in the firm's expected netting benefit compared to the present arrangement?

Trade CombinationNumber of PositionsAverage Correlation
ABC40.25
LMN70.15
PQR13-0.06
TUV15-0.04

Section: Credit Risk Measurement and Management

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