Credit Risk Management Practice Exam

What is a common cause for collateral disputes in credit risk management?

1. Differences in counterparty credit ratings

2. Valuation and population of trades

3. Failure to post initial margins

4. Inconsistent regulatory requirements

The correct answer is: Valuation and population of trades

Valuation and population of trades serve as a common cause for collateral disputes in credit risk management because they directly affect the determination of the collateral amount that should be posted or returned. Discrepancies in how trades are valued can lead to disagreements between parties. If one party values a trade higher than the other, this could result in an insufficient amount of collateral being provided, triggering disputes. Additionally, the population of trades refers to the completeness and accuracy of the trades reported, which can also lead to confusion about collateral obligations. Ensuring that all trades are accurately represented and valued is crucial for effective risk management and maintaining the integrity of the collateral process. When these aspects are not aligned between parties, it often leads to disputes that can complicate credit risk management efforts. In contrast, while differences in credit ratings, failure to post margins, and inconsistent regulatory requirements can all contribute to risk management challenges, they are less directly tied to the immediate cause of collateral disputes compared to the valuation and population of trades.