Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Initial Margin and maintenance margin ensure that the clearing house will never be at a loss. Do you agree?
Expert Solution
Step 1
Clearing house is an intermediary between a buyer and seller responsible for settling trading accounts, clearing trades, collecting and maintaining margins, regulating deliveries and reporting trades.
Step 2
Clearing houses collect an initial margin from its clearing members as a safety net for their exposure and maintenance margin in a period of time based on their change in exposure. Clearing houses also face replacement cost risks, liquidity risks and delivery risk from its members.
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