Explanation:
B is correct.
With Netting:
Without Netting:
Key Concept: Netting reduces credit exposure by allowing offsetting positions to cancel each other out, while without netting, each position is treated separately and only the positive exposures are considered.
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A financial institution has four open derivative positions with an investment company. A description of the positions and their current market values are displayed in the table below:
| Position | Exposure (USD) |
|---|---|
| Long swaptions | 32 million |
| Long credit default swaps | 12 million |
| Long currency derivatives | -16 million |
| Long futures contracts | -8 million |
If the investment company defaults, what would be the loss to the financial institution if netting is used compared to the loss if netting is not used?
A
Loss of USD 20 million if netting is used; loss of USD 24 million if netting is not used
B
Loss of USD 20 million if netting is used; loss of USD 44 million if netting is not used
C
Loss of USD 24 million if netting is used; loss of USD 32 million if netting is not used
D
Loss of USD 20 million if netting is used; loss of USD 24 million if netting is not used
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