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Answer: In regard to futures contracts, CCPs do not pay interest on initial margin, but they must pay interest on variation margin
**Correct answer: A** Statement **A** is false. In a futures/CCP setting, **initial margin is typically not paid interest** because it is posted as collateral. **Variation margin** is the daily mark-to-market settlement of gains and losses; it is not generally described as an amount on which the CCP *must pay interest*. The other statements are true: - **B**: The term *margin* is used in both exchange-traded and OTC markets. - **C**: Initial margin depends on price volatility and the time needed to close out a defaulting member’s position. - **D**: Variation margin transfers losses from the losing side to the winning side, so the CCP is only an intermediary and has no net cash inflow or outflow overall.
Author: Manit Arora
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Question 21.10.1. In regard to a futures exchange and/or its vertically owned CCP (aka, futures market that trades futures contract), each of the following statements is TRUE except which is false?
A
In regard to futures contracts, CCPs do not pay interest on initial margin, but they must pay interest on variation margin
B
While "margin" traditionally referred to collateral in an exchange-traded market, it can also refer to collateral in the OTC market
C
Initial margin is a function of the volatility of the futures price and an estimation of time required to close out the member if the member defaults
D
Because the number of long positions is equal to the number of short positions, the flow of variation margin through the CCP is from members who are net long (or net short) to members who are net short (or net long), but there is no net cash inflow or outflow to the CCP
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