Credit Risk Management Practice Exam

What is the minimum transfer amount in a collateral agreement?

1. The minimum collateral amount for a trade

2. The smallest unit of collateral that can be transferred

3. The maximum potential exposure permitted

4. The average margin required across trades

The correct answer is: The smallest unit of collateral that can be transferred

The concept of the minimum transfer amount in a collateral agreement typically refers to the smallest unit of collateral that can be transferred between parties. This is significant in managing credit risk because it ensures that the movement of collateral is efficient and practical. For instance, if the minimum transfer amount stipulates that only certain thresholds or amounts can be mobilized, it prevents frequent, small transfers that might be cumbersome or administratively burdensome. While the other options touch on relevant aspects of collateral agreements — such as the overall amount or average requirements — they do not capture the specific nuance of the minimum transfer amount. The minimum transfer amount is explicitly concerned with the smallest legitimate transaction that can occur regarding collateral, making it a critical operational detail in managing collateralized trades and risk exposure.