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FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

Under a one-way CSA, a corporate client with a weaker credit rating must post collateral to its dealer bank, but the dealer posts none. Which statement best describes the effect on credit exposure?

The dealer's exposure to the client is reduced because the client posts collateral, but the client stays exposed to the dealer when the trades are in the client's favor, since the dealer posts nothing. Netting is unaffected by the one-way structure.

  1. AThe dealer's counterparty credit risk to the client is reduced, while the client remains exposed to the dealer when the contract is in the client's favorCorrect
  2. BBoth parties' counterparty credit risk is eliminated
  3. CThe client's exposure to the dealer is reduced and the dealer's exposure is unchanged
  4. DNetting is nullified because collateral flows only one way

Explanation

Collateral posted by the client covers the dealer's claim, lowering the dealer's exposure. The client receives no collateral, so it stays uncollateralized when the dealer owes it. Netting is independent of collateral direction.

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