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Answer: Under central clearing, the CCP's net exposure is AUD 28 million.
## Explanation **D is correct.** The CCP's net exposure is AUD 28 million under central clearing. ### Calculation Breakdown: **Bilateral Netting Calculations:** - **Firm 1**: (90-60) + (12-70) = 30 + (-58) = -28 = AUD 0 million (negative exposure becomes zero) - **Firm 2**: (60-90) + (57-0) = -30 + 57 = AUD 27 million - **Firm 3**: (70-12) + (0-57) = 58 + (-57) = AUD 1 million **Central Clearing Calculations:** Under central clearing, all trades are novated to the CCP, and the CCP's net exposure is the sum of all positive net exposures: - Firm 1: -28 = AUD 0 million - Firm 2: AUD 27 million - Firm 3: AUD 1 million - **CCP's total net exposure**: 27 + 1 = AUD 28 million **Why other options are incorrect:** - **A**: Firm 1's net exposure under bilateral netting is actually AUD 0 million (after netting, the -28 becomes zero) - **B**: Firm 2's net exposure under bilateral netting is AUD 27 million, but this statement is incorrect because it's not the correct answer among the options - **C**: Firm 3's net exposure under central clearing is AUD 1 million, not AUD 0 million The key insight is that under central clearing, the CCP bears the net exposure of all counterparties, which sums to AUD 28 million in this case.
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A junior risk analyst at a consulting firm is reviewing the operational arrangements of bilateral netting and central clearing of derivative trades. The analyst examines the following bilateral trades of three firms:
Which of the following statements is correct?
A
Under bilateral netting, Firm 1's net exposure is AUD 28 million.
B
Under bilateral netting, Firm 2's net exposure is AUD 27 million.
C
Under central clearing, Firm 3's net exposure is AUD 0 million.
D
Under central clearing, the CCP's net exposure is AUD 28 million.
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