Credit Risk Management Counterparty Credit Risk 2

Question 1

Which of the following is a key advantage of central clearing through a Central Counterparty (CCP) for OTC derivatives?

Accepted Answer

Reduction of bilateral counterparty credit risk through multilateral netting and default management

Answer

CCPs reduce bilateral counterparty credit risk by interposing themselves as buyer to every seller and seller to every buyer, enabling multilateral netting and standardized default management.

Question 2

Debit Value Adjustment (DVA) in derivatives pricing accounts for:

Accepted Answer

The bank's own credit risk as viewed from the counterparty's perspective

Answer

DVA reflects the value of the bank's own default risk to the counterparty — it is the benefit the bank receives because it could default on its obligations.

Question 3

Under Basel III, the Standardized Approach for Counterparty Credit Risk (SA-CCR) replaced the Current Exposure Method primarily because:

Accepted Answer

It better recognizes the risk-reducing effects of netting, collateral, and hedging

Answer

SA-CCR was designed to more accurately reflect actual exposures by properly accounting for netting, collateral, and market risk factors across asset classes.

Question 4

What is the primary purpose of an Initial Margin (IM) in bilateral OTC derivatives?

Accepted Answer

To cover potential future exposure from the time of default to the close-out of positions

Answer

Initial margin protects against the market risk of a portfolio during the margin period of risk (MPOR) — the period between a counterparty's last collateral posting and the close-out of positions after default.

Question 5

Variation Margin (VM) in OTC derivatives is exchanged to:

Accepted Answer

Settle the daily mark-to-market changes in portfolio value

Answer

Variation margin is collected or paid daily (or intraday) to reflect the current mark-to-market value of the portfolio, keeping net exposure near zero.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Counterparty Credit Risk 2