CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
In an exchange-traded futures market, the clearinghouse most likely reduces counterparty credit risk by:
The clearinghouse becomes the buyer to every seller and the seller to every buyer. This substitution of the clearinghouse as counterparty to both sides means traders face the clearinghouse rather than each other, which sharply reduces counterparty default risk in exchange-traded futures.
- Abecoming the buyer to every seller and the seller to every buyerCorrect
- Bguaranteeing a minimum profit to each long position
- Csetting the futures price each day at the previous close
Explanation
Through novation, the clearinghouse interposes itself between the original parties, becoming the counterparty to each side. Each trader then faces the clearinghouse rather than the other trader. The other options describe functions that clearinghouses do not perform.
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