CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
A clearinghouse for exchange-traded futures contracts most likely reduces counterparty credit risk by:
A clearinghouse reduces counterparty credit risk by acting as the buyer to every seller and the seller to every buyer. Each trader then faces the clearinghouse instead of the original counterparty, and margin requirements and daily settlement support this guarantee.
- Aacting as the buyer to every seller and the seller to every buyer.Correct
- Bsetting the futures price each day so that no party can lose money.
- Crequiring each party to verify the other party's creditworthiness before trading.
Explanation
The clearinghouse becomes the counterparty to both sides of each trade, so each party faces the clearinghouse rather than the other trader. Margining supports this, but it does not stop losses, and parties need not assess each other's credit.
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