Credit Risk Management Practice Exam

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What does a Credit Support Annex (CSA) primarily aim to do?

Eliminate all financial risks in partnerships
Mitigate credit risk via collateral posting
Allow free trading without restrictions
Define government regulations in finance

The correct answer is: Mitigate credit risk via collateral posting

The primary purpose of a Credit Support Annex (CSA) is to mitigate credit risk through collateral posting. A CSA is an integral part of a master agreement in derivative transactions, particularly in over-the-counter (OTC) markets. It serves to outline the terms under which collateral is posted to secure the obligations of parties involved in trading. By requiring one party to provide collateral to another, it helps ensure that any potential default can be covered by the collateral value, thereby reducing the overall credit exposure between the counterparties. This mechanism not only promotes financial stability by limiting potential losses for the non-defaulting party but also engenders trust between the trading partners, ultimately supporting smoother functioning of the financial markets. The emphasis on credit risk mitigation through collateral management is a key feature of a CSA, distinguishing it from the other options presented, which focus on unrelated concepts.