A company has derivatives transactions with Banks A, B, and C that are worth þ$20 million,...

A company has derivatives transactions with Banks A, B, and C that are worth þ$20 million, $15 million, and $25 million, respectively, to the company. How much margin or collateral does the company have to provide in each of the following two situations?

(a) The transactions are cleared bilaterally and are subject to one-way collateral agreements where the company posts variation margin but no initial margin. The banks do not have to post collateral.
(b) The transactions are cleared centrally through the same CCP and the CCP requires a total initial margin of $10 million.

Expert Solution

Sol: (a) Since, in this situation, the transactions are cleared bilaterally so the company needs to give Banks A, B, & C a total of $ 0 million, $15 million, & $25 million which means a total of $40 million.

(b) When the transactions are cleared centrally, they are netted against each other.Thus, the company's total valuation margin would be -20 +15 + 25 which equates $20 million.Therefore, the total margin will become $30 million($20 million + $10 million).

jeff jeffy answered 2 years ago

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