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Answer: A lower threshold value is equivalent to a larger portion of exposure protected by collateral.
## Explanation In collateral support annex (CSA) agreements, the **threshold** represents the amount of uncollateralized exposure that is allowed before collateral must be posted. **Key points:** - **Lower threshold** = Less uncollateralized exposure allowed - **Lower threshold** = More collateral required to be posted - **Lower threshold** = Larger portion of total exposure is protected by collateral In this case: - Portfolio value: JPY 400 million - Threshold: JPY 180 million - This means the first JPY 180 million of exposure is uncollateralized, and only exposure above JPY 180 million requires collateral If the threshold were lower (e.g., JPY 100 million), then more of the portfolio exposure would be collateralized, thus providing better protection against counterparty risk. Therefore, **Option A is correct** - a lower threshold value is indeed equivalent to a larger portion of exposure being protected by collateral.
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A financial institution has a two-way collateral support annex (CSA) with a counterparty covering a portfolio valued at JPY 400 million. The margining terms of the collateralized portfolio include a threshold of JPY 180 million, a minimum transfer amount of JPY 30 million, and a margin period of risk of 10 days. Which of the following is correct regarding the size of collateral in mitigating the counterparty risk of the portfolio?
A
A lower threshold value is equivalent to a larger portion of exposure protected by collateral.
B
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