2016-FRR Exam Dumps | Which one of the following four alternatives correctly identifies the purpose of a clearinghouse in trading

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GARP.2016-FRR.v2024-09-09.q145
Question 38

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Question 38/145

Which one of the following four alternatives correctly identifies the purpose of a clearinghouse in trading activities?

A. Reduction of counterparty risk and liquidity risk

B. Reduction of basis risk and mark-to-market risk

C. Reduction of operational risk and credit risk

D. Reduction of market risk and credit risk

Correct Answer: A

A clearinghouse serves several vital functions in trading activities, mainly focusing on reducing various types of risk:
* Counterparty Risk:
* The clearinghouse acts as an intermediary between buyers and sellers, ensuring that each party fulfills its contractual obligations. This reduces the risk that one party will default.
* Liquidity Risk:
* By centralizing and standardizing transactions, the clearinghouse enhances market liquidity, making it easier to buy and sell without causing significant price changes.
* Operational Risk:
* The clearinghouse standardizes and streamlines the clearing and settlement processes, reducing the risk of errors and delays.
* Credit Risk:
* The clearinghouse requires margin deposits and marks positions to market daily, minimizing credit risk.
Thus, the primary purpose of a clearinghouse is to reduce counterparty and liquidity risk.
ReferencesSource: How Finance Works

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