Explanation:
Concentration risk relates to a lack of diversification due to clearing members, margins, or both located in a single geographic area. Sovereign (rather than margin) risk relates to any potential loss in the value of sovereign debt held as margin; it also refers to the risk associated with foreign governments potentially defaulting on their debt obligations. Wrong-way risk occurs when exposure to a counterparty is negatively (rather than positively) correlated with the credit quality of the counterparty. Investment (rather than policy) risk occurs when margin funds are at risk for losses due to investment actions outside of the stated investment policy.
(Book 3, Module 32.2, LO 32.h)
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Question 25
A risk manager is reviewing a briefing on risk put together by one of his newer colleagues. Reading over the different types of risk alluded to in the briefing, which of the following statements contained in the briefing is most accurate regarding the risks faced by central counterparties (CCPs)?
A
The potential loss in value of sovereign bonds held as margin by counterparties is captured by margin risk.
B
Wrong-way risk occurs when exposure to a counterparty is positively correlated with the credit quality of the counterparty.
C
Policy risk occurs when margin funds are at risk for losses due to investment actions outside of the stated investment policy.
D
Concentration risk represents a lack of diversification when clearing members and margins are located in a single geographic area.
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