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Financial Risk Manager Part 2

Financial Risk Manager Part 2

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A medium-sized investment firm conducts numerous transactions and has set up netting contracts for 8 stock trade positions, with these positions having an average correlation coefficient of 0.28. As part of its risk management strategy, the firm aims to enhance the benefits derived from diversification by potentially adjusting these netting agreements. The current values of future trade positions adhere to a normal distribution. From the possible trade combinations listed below, which one would lead to the most significant improvement in the firm's expected netting benefit compared to the existing netting 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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