Explanation:
Netting describes the process of netting out the payments made to the two counterparties so that only the net payment needs to be made.
The loss would therefore be,
$12.5m + $3.5m – $11m – $1.5m = $3.5m
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Q.5434 ABC Bank has four open derivative positions with a hedge fund as shown below:
| Position | Exposure ($) |
|---|---|
| Long futures contracts | –1,500,000 |
| Long currency derivatives | –11,000,000 |
| Long credit default swaps | 3,500,000 |
| Long swaptions | 12,500,000 |
What would be the loss to ABC Bank using netting if the hedge fund defaults?
A
Loss of $3.5 million
B
Loss of $1.5 million
C
Loss of $2.0 million
D
Loss of $1.0 million
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