CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
Which statement about the role of a clearinghouse in derivatives markets is most accurate?
The clearinghouse reduces counterparty credit risk through margin requirements, daily settlement and a performance guarantee. It acts as buyer to every seller and seller to every buyer. It does not set prices, and traders still bear market risk from adverse price movements.
- AIt sets the price of each contract at inception
- BIt reduces counterparty credit risk through margining and guaranteesCorrect
- CIt eliminates market risk for both parties to a contract
Explanation
The clearinghouse becomes the counterparty to each side, uses margin and daily settlement, and guarantees performance, reducing credit risk. It does not set prices (market participants do) and does not remove market risk from price changes.
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