Which method(s) is Not used to limit exposure to credit risk?

Question

BlackTom AI · Accepted Answer

When evaluating how credit risk exposure can be limited, it's helpful to examine what each method does in practice.
Option E: Leveraging. This term typically means increasing financial leverage, i.e., using more borrowed funds to finance assets. Increasing leverage effectively heightens credit risk exposure rather than limits it, so this is not a technique used to constrain credit risk.
Option D: Payment netting. Netting aggregations of multiple obligations between two parties reduce the gross exposure by offsetting receivables and payables, thereby lowering credit risk.
Option C: Collateral. Requiring or posting collateral creates a security interest that can be seized or valued if a counterparty defaults, directly reducing potential credit losses.
Option B: Marking to market. Regularly adjusting the value of positions to reflect current market prices helps reveal and limit potential losses by ensuring exposure aligns with current asset values.
Option A: Limiting exposure. Setting caps on how large or concentrated a counterparty's exposure can be, or how much credit risk a firm takes on overall, is a direct method to limit credit risk.
In summary, all of the listed strategies except leveraging (Option E) are commonly used to limit or manage credit risk, whereas leveraging tends to increase risk exposure instead of reducing it.

BU.232.750.81.FA25 Final Exam Fall 2025- Requires Respondus LockDown Browser

Which method(s) is Not used to limit exposure to credit risk?

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