Credit Risk Management Practice Exam

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What can be a result of positive mark-to-market (MtM) on OTC derivatives?

Transaction is deemed "In the Money"
Transaction becomes less valuable
Transaction incurs a loss.
Transaction requires additional collateral.

The correct answer is: Transaction is deemed "In the Money"

A positive mark-to-market (MtM) value on over-the-counter (OTC) derivatives indicates that the current market value of the position is favorable compared to its original terms. This situation arises when the derivative has appreciated in value since it was initiated, meaning the holder could potentially benefit from closing the position at a profit. When a transaction is deemed "In the Money," it signifies that it has intrinsic value, reflecting a positive financial position. In contrast, if a transaction were to become less valuable or incur a loss, it would indicate a negative MtM position, where the market value is not favorable. Similarly, while a transaction that has a positive MtM may necessitate the posting of additional collateral, it is the profitability aspect that directly correlates to the "In the Money" classification. Therefore, identifying that a positive MtM leads to a transaction being "In the Money" provides a crucial understanding of the financial implications for those involved in trading OTC derivatives.