FRM Part II · FRM Exam Part II · Credit Risk
A bank wants to reduce counterparty exposure to a hedge fund on a portfolio of derivatives. Which feature of a credit support annex most directly reduces the exposure that builds up between margin calls?
More frequent margining shortens the margin period of risk, the time during which the portfolio value can move without collateral being exchanged. That directly limits uncollateralized exposure. Higher thresholds, larger minimum transfer amounts or one-way agreements favouring the counterparty all leave the bank more exposed.
- AA higher threshold amount
- BA shorter margin period of risk through more frequent marginingCorrect
- CA larger minimum transfer amount
- DA one-way collateral agreement in favour of the hedge fund
Explanation
Exposure between calls arises because the value can move during the margin period of risk (time from last exchange to close-out). More frequent margining shortens it and reduces uncollateralized movement. Higher thresholds and larger minimum transfer amounts leave more exposure uncollateralized, and a one-way agreement favouring the hedge fund removes the bank's protection.
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