medium · FRM Part 2 Credit Risk
A desk head argues that a new trade with a central counterparty (CCP) is 'risk-free' because it is fully collateralized with daily variation margin.
Which of the following best describes why CVA or capital charges still apply?
- Daily variation margin only covers realized mark-to-market swings, not the eventual cost of closing out the position.
- Collateral reduces most CVA, but Basel III also imposes a separate 'Collateral Valuation Adjustment' charge as a fixed clearing penalty.
- Standard CVA formulas ignore netting benefits at the trade level, which overstates the true risk carried by cleared positions.
- The Margin Period of Risk (MPoR) creates a gap between the last margin payment and the close-out, leaving residual exposure.
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