Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm


Postby » Mon Oct 20, 2014 12:51 pm

Acme Bank has entered into two trades with its counterparty and wants to analyze the
potential benefits of netting. To do this, it will model several scenarios to produce mark-tomarket
(MtM) values for each trade. Their model contains two key assumptions. The first is the
initial mark-to-market (MtM) value of the trade (the derivative contract). The second is the
correlation between each of the two trades. Under which of the following set of assumptions will
the netting benefit be GREATEST; i.e., the netting benefit is the difference between expected
exposure (as an average of scenarios) without netting and compares to the the same but with
a) Negative initial MtM and positive correlation (between trades)
b) Positive initial MtM and positive correlation
c) Negative initial MtM and zero correlation
d) Positive initial MtM and negative correlation
D. Positive initial MtM and negative correlation
In regard to (C), this will produce negative initial MtM, but negative correlation will have the greatest impact

I thought the netting benefit will me greatest when we have negative MTM and negative correlation.. Please clarify

Finance Junkie
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Joined: Wed Apr 09, 2014 6:28 am


Postby edupristine » Tue Oct 21, 2014 7:48 am

Here, you have a doubt whether the netting benefit will be greatest with positive MtM or negative MtM.

In case of positive MtM, an institution calls for collateral and in case of negative MtM, an institution has to post collateral.

Hence, in case of derivatives with a positive value, they will represent a claim in the bankruptcy process. So, the amount to be claimed can be netted against other counterparty transactions.

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