Question: Explain how off-balance-sheet market contracts, or derivative instruments, differ from contingent guaranty contracts. a. What is counterparty credit risk? b. Why do exchange-traded derivative security

Explain how off-balance-sheet market contracts, or derivative instruments, differ from contingent guaranty contracts.

a. What is counterparty credit risk?

b. Why do exchange-traded derivative security contracts have no capital requirements?

c. What is the difference between the potential future exposure and the current exposure of over-the-counter derivative contracts?

d. Why do the credit conversion factors for the potential future exposure differ for various derivatives security contracts?

e. Why do regulators not allow DIs to benefit from positive current exposure values?

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