24-76 Which of the following is true of the "netting" process in the swap market?
A)It mitigates the credit risk on swaps.
B)Both parties make payments to each other as a consequence.
C)It implies that the default exposure of the in-the-money party is the total fixed or floating payment.
D)It does not happen across contracts.
E)Netting by novation increases the potential risk of loss.

Question

Quizplus · Accepted Answer

The netting process in the swap market involves calculating the net obligation of each counterparty and settling only the difference between the two obligations, which reduces the credit risk on swaps. Therefore, option A is true. Option B is incorrect because in the netting process, only the party with the larger obligation makes the payment to the other party. Option C is incorrect because the default exposure of the in-the-money party is not equal to the total fixed or floating payment, but rather the net payment due to the other counterparty. Option D is incorrect because netting happens across multiple contracts. Option E is incorrect because netting by novation reduces the potential risk of loss by replacing the original contracts with a new set that reflects the net payment obligations.

24-76 Which of the Following Is True of the "Netting