Collateral exhaustive risk

Hi All,

Can anyone simplify the collateral exhaustive risk?

Thanks in advance.



is it in CFA level 3 syllabus ?

Assume you are already in retirement and don’t have an annuity, just some cash. But you know you need to pay bills etc. Type I liabilities. So you decide to buy some assets that perfectly match your future liabilities. But you don’t perfectly match your liabilities with assets and adjust with derivatives to make the difference because you figure why not, I took the cfa level 3 exam so I can do this. You spend 100% of your money on setting up the asset portfolio.

Then all of a sudden you need to post some collateral. But you spent all your money. So you have to unwind your futures position.

Less extreme example, your finance director won’t allow you to spend any more company money on collateral even though they might have it available. So you have to unwind your position.