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Answer: The counterparty with negative current exposure must post collateral to the counterparty with positive current exposure such that the total collateral value net of haircuts exceeds the threshold by the current exposure
**A.** The counterparty with negative current exposure must post collateral to the counterparty with positive current exposure such that the total collateral value net of haircuts exceeds the threshold by the current exposure. The counterparty with positive current exposure is the one whose gain is at-risk of default. The party with negative mark-to-market, therefore, delivers the collateral. Current exposure is the typical basis for exposure as that is based on the current mark-to-market value of the position; PFE is future-oriented and highly dependent on model assumptions (there is no reason to expect the counterparties to derive the same PFE).
Author: Manit Arora
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Q-146.2. Which best describes the typical margin call in an over-the-counter (OTC) trade with a bilateral collateralization arrangement?
A
The counterparty with negative current exposure must post collateral to the counterparty with positive current exposure such that the total collateral value net of haircuts exceeds the threshold by the current exposure
B
The counterparty with positive current exposure must post collateral to the counterparty with negative current exposure such that the total collateral value net of haircuts exceeds the threshold by the current exposure
C
The counterparty with negative potential future exposure (PFE) must post collateral to the counterparty with positive PFE such that the total collateral value net of haircuts exceeds the threshold by the PFE
D
The counterparty with positive PFE must post collateral to the counterparty with negative PFE such that the total collateral value net of haircuts exceeds the threshold by the PFE
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