Explanation:
Bilateral OTC uncollateralized derivatives are typically characterized by the absence of collateral posting due to various reasons such as a lack of logistical capability or credit arrangements that negate the need for collateral. This category of derivatives is associated with a higher counterparty credit risk due to the lack of a pledged financial safeguard. It is particularly relevant to certain end users like corporations that may not have the necessary collateral or view it as an onerous requirement.
A is incorrect because in bilateral OTC collateralized derivatives, the parties indeed post assets as collateral to mitigate counterparty risk. B is incorrect because exchange-traded derivatives are characterized by the use of central clearinghouses, which mandate daily margin postings, effectively acting as collateral. D is incorrect because OTC centrally cleared derivatives similarly require the posting of daily variation margin as a form of collateral.
Things to Remember
Ultimate access to all questions.
No comments yet.
Q.6135 In an industry conference on derivatives markets, a regulatory advisor is discussing recent trends in risk mitigation practices among various participants. During the talk, the advisor points out a distinctive group of market participants known for not typically posting collateral in bilateral Over-The-Counter (OTC) derivative transactions. This group often consists of corporations or end users that either cannot commit to collateralization or are not required to do so by their counterparties. Which group of derivatives does this practice best describe?
A
Bilateral OTC collateralized derivatives.
B
Exchange-traded derivative.
C
Bilateral OTC uncollateralized derivatives.
D
OTC centrally cleared derivatives.