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FRM Part I · FRM Exam Part I · Central Clearing

Compared with a one-day margin period of risk, what is the most likely effect on a CCP's initial margin requirement of lengthening the margin period of risk to five days for an illiquid portfolio?

Initial margin increases. A longer margin period of risk means prices can move further before the defaulter's positions are closed out, so the potential loss estimate at a given confidence level is larger, and the CCP must collect more margin to cover it.

  1. AInitial margin increases because more price movement can occur before positions are closed outCorrect
  2. BInitial margin decreases because variation margin is collected less often
  3. CInitial margin is unchanged because it depends only on the confidence level
  4. DInitial margin falls because the default fund absorbs more of the loss

Explanation

A longer margin period of risk allows more adverse price movement before close-out, so the loss quantile and therefore initial margin rise. Confidence level is not the only driver. The default fund sits behind margin and does not reduce it.

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