Which of the Following Is True of the "Netting" Process

question 95

Multiple Choice

Which of the following is true of the "netting" process in the swap market?

• A)It decreases or mitigates the credit risk on swaps.
• B)Both parties make payments to each other as a consequence.
• C)It implies that the default exposure of the in-the-money party is the total fixed or floating payment.
• D)It does not happen across contracts.
• E)Netting by novation increases the potential risk of loss.

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Definitions:

Premium

The amount by which the price of something, such as a security or insurance policy, exceeds its face value or principal.

European Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy an asset at a specified price on a specified date.

Exercise Price

The price at which the holder of an option contract may buy (in the case of a call option) or sell (in the case of a put option) the underlying asset when the option is exercised.

Underlying Asset

The financial asset upon which derivative instruments, such as futures, options, or warrants, are based or derived from.