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Explanation:
A shorter remargining period means that the collateral requirements are reviewed and adjusted more frequently. This approach is particularly beneficial in volatile markets as it allows for quicker responses to changes in the market value of derivatives, thereby reducing the firm's exposure to market volatility and counterparty credit risk.
A is incorrect because shortening the remargining period actually increases operational costs due to more frequent collateral adjustments and administrative work.
B is incorrect as a shorter remargining period actually decreases exposure to market volatility and counterparty risk by enabling more timely adjustments to collateral based on current market conditions.
D is incorrect because the length of the remargining period is a critical factor in managing exposure to market volatility. A shorter period allows for more responsive collateral management in relation to market changes.
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Q.5493 Quantum Investments, a mid-sized investment firm, engages in frequent derivative transactions. Given the volatile nature of the market, the firm's risk management department is evaluating the appropriateness of their current remargining period policy. The existing policy mandates a remargining period of three days, but there is a debate whether shortening this period could more effectively mitigate risk associated with the fluctuating market values of their derivative positions. Considering Quantum Investments' focus on derivatives in a volatile market, how would shortening the remargining period impact their risk exposure?
A
Shortening the remargining period will decrease operational costs by reducing the frequency of collateral adjustments.
B
A shorter remargining period will increase exposure to market volatility and counterparty risk.
C
Reducing the remargining period will decrease the firm's exposure to market volatility by allowing more frequent collateral adjustments.
D
The length of the remargining period has no significant impact on the firm's exposure to market volatility.