Answer: Implement a netting scheme

## Explanation **A. Implement a netting scheme** is the most appropriate credit risk mitigation technique in this case because: - The bank has multiple derivatives contracts with the same counterparty (ABCD) - The total gross exposure across all contracts is HKD 65,000,000 (20M + 30M + 14M + 1M) - Netting allows offsetting positions to be netted against each other, significantly reducing the credit exposure - For derivatives, netting agreements (such as ISDA Master Agreements with netting provisions) can reduce counterparty credit risk by allowing positive and negative mark-to-market values to offset - This is particularly effective when dealing with multiple contracts with the same counterparty **Why other options are less appropriate:** - **B. Use credit triggers**: While useful, credit triggers typically require the counterparty's credit rating to deteriorate before being activated - **C. Sell credit default swaps on ABCD**: This would actually increase the bank's exposure to ABCD rather than mitigate it - **D. Increase collateral**: Collateral requirements would need to be negotiated and may not be as immediately effective as netting for reducing exposure Netting is the most direct and effective way to reduce counterparty credit risk when multiple contracts exist with the same counterparty.

Author: LeetQuiz .