Taking Collateral to Hedge the Credit Risk on a Counterparty

question 421

Multiple Choice

Taking collateral to hedge the credit risk on a counterparty means that you have:

• A) Eliminated credit risk
• B) Eliminated market risk
• C) Taken a guarantee from the issuer of the collateral
• D) Taken on market, legal and operational risks

---

Definitions:

Stock Price

The cost of purchasing a share of a company, reflecting the company's current market valuation.

Expected Dividends

The dividends that shareholders anticipate receiving on their investments in a corporation, based on past dividends and the company's current profitability.

Time Value

The additional amount an investor is willing to pay for an option or other financial product based on its potential to increase in value over time.

Out-of-the-Money

Describes an option that would not result in a profit if exercised immediately because its strike price is less favorable compared to the market price of the underlying asset.