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:
In this case:
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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