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

Question

Quizplus · Accepted Answer

Taking collateral to hedge credit risk introduces market risk (due to changes in the value of the collateral), legal risk (due to enforceability of the collateral agreement), and operational risk (due to the processes involved in managing the collateral).

Taking Collateral to Hedge the Credit Risk on a Counterparty