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Financial Risk Manager Part 2

Financial Risk Manager Part 2

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Q-88. In the context of Central Counterparties (CCPs), which play a critical role in mitigating systemic risk in financial markets by acting as intermediaries between buyers and sellers, the loss absorption waterfall defines the sequence of financial resources used to cover losses from a member's default. This mechanism ensures market stability and protects non-defaulting members. Now a CCP with 10 clearing members faces a default by one member, resulting in a total loss of 75 units. Key parameters include:

  • Each member's Initial Margin (IM) = 10
  • Each member's Default Fund (DF) contribution = 20
  • CCP's Skin-in-the-Game Equity (SIG) = 25

What is the remaining Default Fund Reserve after absorbing the loss?

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