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Answer: Loss mutualization may not spread all the losses among participants.
## Explanation Option D is the least likely problem because: - **Option A**: Correctly describes a problem - counterparty defaults in bilateral OTC trades can indeed create systemic risk due to interconnectedness - **Option B**: Correctly describes a problem - bilateral OTC derivatives are often customized with exotic features, making them less standardized - **Option C**: Correctly describes a problem - closing out bilateral trades can be difficult due to lack of centralized clearing - **Option D**: This is NOT a problem with bilateral OTC trades because loss mutualization is a feature of centralized clearing, not bilateral clearing. In bilateral arrangements, losses are not mutualized among participants - each party bears its own counterparty risk. Therefore, D is the least likely problem as it describes a feature that doesn't exist in bilateral clearing arrangements.
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Which of the following statements least likely describe a problem with bilaterally cleared over-the-counter (OTC) derivatives trades?
A
The defaults of individual counterparties could lead to systemic problems.
B
Bilateral OTC derivatives are often non-standard with exotic features.
C
Closing out trades may be difficult.
D
Loss mutualization may not spread all the losses among participants.
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