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Explanation:
Without a legally enforceable netting agreement, ATC's credit exposure is simply the sum of all positive mark-to-market (MtM) values (ignoring the negative ones, as they do not offset exposure):
Exposure (without netting) = $120 + 85 + 80 + 75 + 10 = 370$
With a legally enforceable netting agreement, ATC's credit exposure is the maximum of zero and the net sum of all MtM values across all contracts:
Net Sum = $120 + 85 - 65 - 50 + 80 - 90 + 75 + 10 - 140 = 25\max(0, 25) = 25$
The improvement (i.e., reduction) in credit exposure due to the netting agreement is:
$370 - 25 = 345$
Q.44 ATC, a seasoned derivative maker, has nine contracts with a counterparty, all transacted in Sydney, Australia. The contracts have current market values of 120, 85, -65, -50, 80, -90, 75, 10, and -140. At present, ATC does not have a legally binding netting agreement with the counterparty. By how much would ATC’s current credit exposure to this counterparty improve if it had a legally enforceable netting agreement with the said counterparty?
A
0
B
25
C
345
D
330
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