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FRM Part II · FRM Exam Part II · Credit Risk

A bank wants to reduce counterparty exposure on a derivatives portfolio with a client. Which feature of a credit support annex will most directly reduce exposure growth during the margin period of risk?

More frequent margin calls together with a lower threshold and minimum transfer amount reduce exposure most directly. They keep collateral closely aligned with current mark-to-market, so less uncollateralized exposure can accumulate between the last margin call and close-out after default.

  1. AMore frequent margin calls and a lower threshold and minimum transfer amountCorrect
  2. BA higher unsecured threshold amount
  3. CA longer remargining period between calls
  4. DAllowing the counterparty to post only its own debt as collateral

Explanation

Frequent calls and a low threshold and minimum transfer amount keep collateral close to current exposure, shortening the effective period over which uncollateralized exposure can build. A higher threshold leaves more unsecured. A longer remargining period lengthens the margin period of risk. Own-debt collateral creates wrong-way risk and is poor protection.

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