Answer: Loss of USD 20 million if netting is used; loss of USD 44 million if netting is not used

## Explanation This question involves understanding the concept of netting in credit risk management. Netting allows financial institutions to offset positive and negative exposures when calculating credit exposure to a counterparty. **Key Concepts:** - **Without netting**: Each transaction is treated separately, and the financial institution would lose the full amount owed to them by the defaulting counterparty - **With netting**: Positive and negative exposures are netted, resulting in a single net exposure amount **Analysis:** - Option B shows a loss of USD 20 million with netting and USD 44 million without netting - This represents a significant reduction in exposure when netting is applied (USD 24 million reduction) - The difference between the two scenarios (USD 44M - USD 20M = USD 24M) represents the amount that was offset through netting **Why Option B is correct:** - The USD 20 million loss with netting represents the net exposure after offsetting positive and negative positions - The USD 44 million loss without netting represents the gross exposure where all positive positions are lost - This demonstrates the risk mitigation benefit of netting arrangements in reducing credit exposure **Practical Application:** Netting is particularly important in derivatives trading and other financial contracts where parties have multiple offsetting positions with the same counterparty. It reduces counterparty credit risk and is a key component of modern risk management practices.

Author: LeetQuiz .