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Answer: Ensuring that sufficient collateral is posted by counterparties
A is correct. Counterparty exposure, in theory, can be almost completely neutralized as long as a sufficient amount of high-quality collateral, such as cash or short-term investment grade government bonds, is held against it. If the counterparty were to default, the holder of an open derivative contract with exposure to that counterparty would be allowed to receive the collateral. This method ensures that the company is protected against the risk of counterparty default, thereby significantly reducing its overall counterparty exposure. The other options, such as diversifying among counterparties, cross-product netting on a single counterparty basis, and purchasing credit derivatives, do not effectively mitigate the company's counterparty exposure in this specific scenario.
Author: LeetQuiz Editorial Team
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To assist the company's management in significantly mitigating its overall counterparty risk and potentially achieving near elimination, which of the following strategies would be most effective?
A
Ensuring that sufficient collateral is posted by counterparties
B
Diversifying among counterparties
C
Cross-product netting on a single counterparty basis
D
Purchasing credit derivatives, such as credit default swaps