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Basic Question 3 of 5
The clearinghouse's futures position is relatively low-risk because ______.
II. it is highly capitalized and backed by large credit lines.
III. it is insured by the U.S. government.
I. all its obligations to deliver are matched to other investors' obligations to make delivery.
II. it is highly capitalized and backed by large credit lines.
III. it is insured by the U.S. government.
User Contributed Comments 4
| User | Comment |
|---|---|
| viannie | It is not insured by the US government, however in the event that "a clearinghouse is unable to pay (very unlikely), then it would turn to its reserve fund or to the exchange, or it would levy a tax on exchange members to cover the losses" (p.60 Vol XI). "Because of its ability to offset, future contracts are said to be fungible, which means that any futures contract with any counterparty can be offset by an equivalent futures contract with another counterparty." |
| viannie | the part of "fungible" is from P 54, Vol XI CFA curriculum. |
| ankurwa10 | I agree with option (1) but then defaults if happen on a large scale would really not mean for the fact that there are parties on both sides of the clearing house. It is in fact option (2) that ensures relative low-risk for a rainy day, isn't it? |
| GBolt93 | Yes, but you still need both aspects in order to be low risk. If all the futures contracts weren't net zero, it would still be risky. Likewise if it didn't have significant capital in the case of large scale defaults it would be risky. Hence without both it wouldn't be low risk. |
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Learning Outcome Statements
describe the basic features of derivative markets, and contrast over-the-counter and exchange-traded derivative markets
CFA® 2025 Level I Curriculum, Volume 5, Module 1.