Explanation:
Netting is a process that allows for the consolidation of all swap agreements between two parties into a single agreement. This process reduces the credit exposure of each party to the other by offsetting the value of multiple positions. This means that the overall credit exposure in the market grows at a rate that's lower than the growth rate of the OTC market itself. This is because netting reduces the risk of default by one party on multiple transactions, which in turn reduces the overall credit risk in the market. This reduction in credit risk allows for more trading and liquidity in the OTC market, contributing to its growth.
Choice B is incorrect because netting does not allow the overall credit exposure to the market to grow at a higher rate than the current growth of the OTC market itself. Instead, netting reduces the overall credit exposure in the market by offsetting the value of multiple positions between two parties. This reduction in credit exposure allows for more trading and liquidity in the OTC market, contributing to its growth.
Choice C is incorrect because netting does not allow the overall credit exposure to the market to grow at a rate that's equal to the current growth rate of the OTC market itself. Netting reduces the overall credit exposure in the market by offsetting the value of multiple positions between two parties. This reduction in credit exposure allows for more trading and liquidity in the OTC market, contributing to its growth.
Choice D is incorrect because netting does not allow the OTC market to grow at a rate that's significantly less than the overall credit exposure growth rate. Instead, netting reduces the overall credit exposure in the market by offsetting the value of multiple positions between two parties. This reduction in credit exposure allows for more trading and liquidity in the OTC market, contributing to its growth.
Things to Remember
Ultimate access to all questions.
No comments yet.
Q.1885 The process of netting has significantly impacted the growth of OTC derivative markets. Because every investor wants to reduce its risk to a minimum. Without netting, the current liquidity and trading sizes of OTC markets cannot be achieved because:
A
netting allows overall credit exposure to the market to grow at a rate that’s lower than the current growth rate of the OTC market itself.
B
netting allows overall credit exposure to the market to grow at a higher rate than the current growth of the OTC market itself.
C
netting allows overall credit exposure to the market to grow at a rate that’s equal to the current growth rate of the OTC market itself.
D
netting allows the OTC market to grow at a rate that’s significantly less than the overall credit exposure growth rate.