CAS Exam 9 Spring 2016, Question 17
Study guide: Exam 9
Below is a table summarizing derivatives with three counterparties. The value columns are from the perspective of XYZ Corporation.
| Counterparty | Credit Rating | Number of Transactions | Value of in-the-money derivatives (Million) | Value of out-of-the-money derivatives (Million) |
|---|---|---|---|---|
| A | AAA | 20 | $1,200 | $0 |
| B | B | 1 | $1,200 | $0 |
| C | C | 38 | $480 | $380 |
The CFO of XYZ Corporation has the option to add credit mitigation clauses to outstanding derivatives with the three counterparties.
Assume all contracts expire on the same date.
For each counterparty, describe a strategy to mitigate credit risk and justify your choice.
Part a (2.25 points)
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