The correct answer is D.

Within a netting set, quantities such as expected exposure and CVA are non-additive. This means that the total expected exposure and CVA of a netting set is not simply the sum of the expected exposures and CVAs of the individual contracts within the set. This non-additive property is beneficial as it results in a reduction of the overall risk. The reason behind this is the potential offsetting effects between the contracts within the netting set. For instance, if one contract within the set experiences a loss, it may be offset by gains in another contract. Therefore, the overall risk of the netting set is likely to be substantially reduced compared to the sum of the risks of the individual contracts.

Choice A is incorrect. The statement that expected exposure and CVA are non-multiplicative within a netting set is not accurate. These quantities do not multiply together to reduce overall risk, but rather they interact in a more complex manner.

Choice B is incorrect. While it might seem intuitive to think of these quantities as simply additive, this oversimplifies the actual dynamics within a netting set. Expected exposure and CVA do not just add up linearly; their interaction can lead to nonlinear effects on overall risk.

Choice C is incorrect. This choice incorrectly suggests that expected exposure and CVA multiply together to reduce overall risk within a netting set. In reality, their interaction involves both additive and multiplicative elements, leading to complex effects on overall risk.

Things to Remember

• Within a netting set, expected exposure and credit value adjustment (CVA) demonstrate non-additive properties.
• The non-additivity in netting sets helps in reducing the overall risk more than if the exposures were simply summed up.