Mock -Q17

Don’t remember the question in details…smth that we needed to choose method to minimize credit risk for swap… the right answer is to limit exposure to counterparty…why did they prefer it to providing collateral ???

the value of the collateral could decrease.

think of bear stearns stocks as collateral.

agree. providing collateral will let us only to minimize credit risk (not to remove it completely) but that is the case for limiting exposure also I would say that all methods have some drawbacks and in this case it’s better to limit exposure+ to use collateral. I just don’t understand why to prefer limiting exposure to collateral here. Neither of these two methods are perfect.

I had trouble with this question too, what is the problem with limiting credit activities to counterparties with adaquete credit? It just said adaquete not good, I can understand if it said good since to make money sometimes you need to take risk but it said adaquete not good or great or something like that.