FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
In a delivery-versus-payment (DVP) repo settlement, what is the main risk it reduces compared with free delivery?
DVP mainly reduces principal, or settlement, risk. Securities and cash transfer simultaneously and conditionally, so one party cannot deliver while the other fails to pay. It does not eliminate collateral price risk, interest rate exposure, or the rollover risk of short-term repo funding.
- APrincipal risk, where one leg is delivered but the other is notCorrect
- BInterest rate risk on the collateral over the term
- CCollateral price risk from falling market values
- DLiquidity risk from rolling the repo each day
Explanation
DVP links the transfer of securities and cash so that one occurs only if the other does, removing principal (settlement) risk. It does not remove market risk on collateral, interest rate exposure, or rollover risk.
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