Answer-first summary for fast verification
Answer: EUR 2 million
## Trade Compression Analysis Trade compression reduces counterparty risk by netting offsetting positions. Let's analyze the positions: ### Original Positions: 1. **Digital Corporation → NUMU Inc.** - Notional: EUR 9 million - Position: Long protection (bank buys protection) - Coupon: 180 bps 2. **Digital Corporation → WKI Company** - Notional: EUR 6 million - Position: Long protection (bank buys protection) - Coupon: 150 bps 3. **WKI Company → NUMU Inc.** - Notional: EUR 7 million - Position: Short protection (bank sells protection) - Coupon: 150 bps ### Netting Analysis: - **NUMU Inc. positions:** - Long protection: EUR 9 million (from Digital Corporation) - Short protection: EUR 7 million (from WKI Company) - Net position: EUR 2 million long protection - **WKI Company positions:** - Long protection: EUR 6 million (from Digital Corporation) - Short protection: EUR 0 million - Net position: EUR 6 million long protection ### Trade Compression Result: After compression, the bank has: - EUR 2 million long protection on NUMU Inc. - EUR 6 million long protection on WKI Company - **Total compressed notional: EUR 8 million** However, the question asks for the **net contract on compressed trades only**, which refers to the net position after offsetting. The EUR 2 million represents the net position after offsetting the NUMU Inc. trades. **Correct Answer: B (EUR 2 million)** - This represents the net position on NUMU Inc. after offsetting the long and short protection positions.
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The head of the structured securities desk at an investment bank directs all derivatives traders on the desk to use trade compressions on all eligible trades to reduce counterparty risk. One of the analysts decides to use trade compression on a portfolio of single-name CDS contracts with the same maturity and transacted with two counterparties to estimate the investment bank's compressed notional value:
| Counterparty | Reference credit | Notional (EUR million) | Bank's position | Coupon (bps) |
|---|---|---|---|---|
| Digital Corporation | NUMU Inc. | 9 | Long protection | 180 |
| Digital Corporation | WKI Company | 6 | Long protection | 150 |
| WKI Company | NUMU Inc. | 7 | Short protection | 150 |
What is the notional value of the investment bank's net contract on compressed trades only?
A
EUR 1 million
B
EUR 2 million
C
EUR 8 million
D
EUR 15 million