Explanation:
SPVs are designed to be bankruptcy remote, which means that the default of one party will not cause the SPV to default. This feature helps to mitigate counterparty and credit risk exposure in OTC derivatives transactions, as it helps to protect the assets held by the SPV in the event of a default.
A is incorrect. An SPV is not a type of bank. It is a non-bank financial institution that is typically structured as a trust, company, or partnership.
B is incorrect. The use of an SPV does not eliminate all counterparty and credit risk exposure in OTC derivatives transactions. While it can help to mitigate this risk, there is still the potential for default by either counterparty.
D is incorrect. When using an SPV, assets are transferred to the SPV in exchange for cash, not shares of the company. This provides the transferring party with cash liquidity while also isolating the risk associated with the OTC derivative transaction.
Q.5356 A risk manager at a bank is considering using a Special Purpose Vehicle (SPV) to mitigate counterparty and credit risk exposure in an over-the-counter (OTC) derivatives transaction. Which of the following statements regarding the use of an SPV is correct?
A
An SPV is a type of bank that is structured as a trust, company, or partnership.
B
The use of an SPV eliminates all counterparty and credit risk exposure in OTC derivatives transactions.
C
The default of one party will not cause the SPV to default.
D
When using an SPV, assets are transferred to the SPV in exchange for shares of the company.
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