The correct answer is A.

Payment netting covers all cases where a financial institution needs to make and receive more than one payment during a single day. This mechanism allows the institution to aggregate same-day cash flows into one net payment. In this case, the institution would need to make a single net payment of $5m, with the $200m payment having no associated risk.

Things to Remember

• Payment netting helps reduce settlement risk by consolidating multiple payments into a single net amount.
• Netting can be done on a gross basis (each payment is netted individually) or on a multilateral net basis (all payments are netted against each other).
• Netting agreements are common in derivative transactions to simplify cash flow management.
• Netting can be bilateral (between two parties) or multilateral (involving multiple parties).