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Q. Compared to a transaction contracted through a clearing house, a bilateral arrangement will most likely...

Q. Compared to a transaction contracted through a clearing house, a bilateral arrangement will most likely have a:

  1. lower credit risk.
  2. lower systemic risk.
  3. higher counterparty risk.
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Answer #1

Since the contract is directly with the other party, there is a greater risk of counterparty default since both parties may not have full knowledge of the financial health of the other (and their ability to cover obligations). This differs from products contacted through a clearing house. In this case, the clearing house is the counterparty, not the single entity on the other side of the trade.

The answer is thus C. Higher counterparty risk

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