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Answer: The counterparty with negative current exposure must post collateral to the counterparty with positive current exposure such that total collateral value net of haircuts exceeds the threshold by the current exposure
In a bilateral OTC collateral arrangement, the party that is **out of the money**—that is, the party with **negative current exposure**—typically posts collateral to the party that is **in the money** and has **positive current exposure**. A margin call is driven by **current exposure**, not PFE. The collateral posted, after accounting for haircuts, is intended to reduce unsecured exposure above any agreed threshold.
Author: Manit Arora
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Question-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 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 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 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 total collateral value net of haircuts exceeds the threshold by the PFE
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