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Answer: Under bilateral netting, Firm 1's net exposure is AUD 28 million.
## Explanation Let's calculate the net exposures under bilateral netting and central clearing: ### Bilateral Netting Calculations: **Firm 1:** - Receives from Firm 2: AUD 60 million - Receives from Firm 3: AUD 70 million - Pays to Firm 2: AUD 90 million - Pays to Firm 3: AUD 12 million - Net exposure = (60 + 70) - (90 + 12) = 130 - 102 = AUD 28 million ✓ **Firm 2:** - Receives from Firm 1: AUD 90 million - Receives from Firm 3: AUD 0 million - Pays to Firm 1: AUD 60 million - Pays to Firm 3: AUD 57 million - Net exposure = (90 + 0) - (60 + 57) = 90 - 117 = -AUD 27 million (net payer) **Firm 3:** - Receives from Firm 1: AUD 12 million - Receives from Firm 2: AUD 57 million - Pays to Firm 1: AUD 70 million - Pays to Firm 2: AUD 0 million - Net exposure = (12 + 57) - (70 + 0) = 69 - 70 = -AUD 1 million (net payer) ### Central Clearing: Under central clearing through a CCP, all firms have positions with the CCP: - Firm 1: Net position = AUD 28 million (receiver) - Firm 2: Net position = -AUD 27 million (payer) - Firm 3: Net position = -AUD 1 million (payer) The CCP's net exposure is zero as it matches all positions. Therefore, only statement A is correct.
Author: LeetQuiz .
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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