Explanation:
For exchange-traded derivatives, the specific collateral requirement is that margin must be posted against losses on a daily basis by all exchange members. This requirement supports the central clearing function provided by derivatives exchanges, which guarantees the performance of all its members and represents a key risk management feature of exchange-traded derivatives.
A is incorrect because all derivative instruments, even exchange-traded ones, carry some level of risk that is not naturally hedged by the instrument itself; hence collateral in the form of margin is required.
B is incorrect because collateral requirements for exchange-traded derivatives include daily margining to manage ongoing market exposures, not just at contract maturity.
D is incorrect because collateral for exchange-traded derivatives is typically in the form of cash margins, not physical assets, and is required on a recurring daily basis, not just at inception.
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Q.6136 A financial analyst is reviewing the risk management protocols for different classes of derivatives to propose enhancements to the firm's trading strategies. The analyst is tasked with identifying the specific collateral requirements for a particular group within the derivatives market. For exchange-traded derivatives, what are the specific collateral requirements typically associated with these instruments?
A
No collateral is posted as these instruments are considered self-hedging.
B
Collateral is posted only at contract maturity to cover the final settlement amount.
C
Margin must be posted against losses on a daily basis by all exchange members.
D
Collateral in the form of physical assets is required at the initiation of the contract.
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