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Hi David,

Apologies for the last minute questions. I have 2 doubts with respect to the below question from GARP's 2013 sample questions.

I understand that collateral in general reduces exposure,....although there are specific instances where it can increase exposure as well (example - collateral posted by counterpart A with counterpart B exceeds the actual exposure that counterpart B faces with respect to A).

They calculate the worst case change in value of

My approach was to calculate the worst case change in value of

Treasury note with an effective price volatility of 8%. The correlation between the exposure and the U.S.

Treasury note is zero. Changes in the value of the overall position (exposure plus collateral) are calculated for

a 10-day horizon at a 95% confidence interval (assume a year of 250 days). Which of the following would one

expect to observe from this analysis?

between remargining periods.

between remargining periods.

between remargining periods.

between remargining periods.

Correct answer: c

The overall volatility of the position: (.06^2 + .08^2)^0.5 = 10%

Thus the worst case change in the value of this position (exposure + collateral) is:

-1.96 * 10% * (10/250)0.5 = -3.92%

Thus, the collateral mitigates the exposure today while increasing the volatility of the position in the future.

Apologies for the last minute questions. I have 2 doubts with respect to the below question from GARP's 2013 sample questions.

**How do we infer from the below data if collateral increases or decreases**

Doubt 1 -Doubt 1 -

**current exposure ??**I understand that collateral in general reduces exposure,....although there are specific instances where it can increase exposure as well (example - collateral posted by counterpart A with counterpart B exceeds the actual exposure that counterpart B faces with respect to A).

**Doubt 2 -**With regards to the impact of collateral on exposure volatility between remargining periods, I have a concern with how GARP has presented the answer.They calculate the worst case change in value of

**collateral**and the worst case change in the value of**exposure with collateral**and then arrive at the conclusion that collateral increases volatility.My approach was to calculate the worst case change in value of

**exposure****without collateral**and the worst case change in the value of**exposure with collateral**and then arrive at the conclusion that collateral increases volatility of exposure. Is there a logic behind GARP's way of approaching the question please ?**GARP Question**

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11.An underlying exposure with an effective annual price volatility of 6% is collateralized by a 10-year U.S.-----------------------------------------------------------------------------------------------------------------

11.

Treasury note with an effective price volatility of 8%. The correlation between the exposure and the U.S.

Treasury note is zero. Changes in the value of the overall position (exposure plus collateral) are calculated for

a 10-day horizon at a 95% confidence interval (assume a year of 250 days). Which of the following would one

expect to observe from this analysis?

**a.**The presence of collateral increases the current exposure and increases the volatility of the exposurebetween remargining periods.

**b.**The presence of collateral increases the current exposure, but decreases the volatility of the exposurebetween remargining periods.

**c.**The presence of collateral decreases the current exposure, but increases the volatility of the exposurebetween remargining periods.

**d.**The presence of collateral decreases the current exposure and decreases the volatility of the exposurebetween remargining periods.

Correct answer: c

**Explanation:**Worse case change for the value of the collateral is: -1.96 * 8% * (10/250)0.5 = -3.136%The overall volatility of the position: (.06^2 + .08^2)^0.5 = 10%

Thus the worst case change in the value of this position (exposure + collateral) is:

-1.96 * 10% * (10/250)0.5 = -3.92%

Thus, the collateral mitigates the exposure today while increasing the volatility of the position in the future.

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