Answer: CCPs are at risk of wrong-way risk (WWR) because they disassociate credit quality and Exposure.

## Explanation Wrong-way risk (WWR) occurs when exposure to a counterparty is positively correlated with the counterparty's probability of default. For central counterparties (CCPs), this risk arises because: - **CCPs disassociate credit quality and exposure**: CCPs typically accept collateral based on standardized haircuts rather than the specific credit quality of individual counterparties. This means they may hold insufficient collateral when a counterparty's credit quality deteriorates. - **Systemic risk concerns**: During periods of market stress, multiple large dealers may face simultaneous defaults, creating concentrated exposure for CCPs. - **Collateral valuation issues**: The value of posted collateral may decline precisely when counterparty credit risk increases, exacerbating WWR. Option C correctly identifies that CCPs are at risk of WWR due to the disassociation between credit quality and exposure management. The other options are incorrect: - A: Larger dealers can actually represent wrong-way risk, not right-way risk - B: CCPs are not immune to WWR; in fact, they face significant WWR challenges - D: CCPs' collateral acceptance methods can actually promote wrong-way risk rather than right-way risk

Author: LeetQuiz .