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CFA Level 2
Portfolio Management

Understanding the Role of Collateral in Credit Risk Management

Easy Risk Management Applications Credit Risk Management

As part of its risk management strategy, a financial institution is assessing its exposure to credit risk when executing transactions with counterparties. The institution is considering the usage of several credit risk management tools to mitigate potential losses from defaults. One approach under consideration involves the use of collateral agreements.

Which of the following statements accurately describes the role of collateral in managing credit risk?

Hint

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