A margin agreement protects a derivative claim only to the extent that usable collateral has arrived before default. A zero threshold does not guarantee zero loss if market value jumps or margin calls lag. This lesson applies the collateral convention in QRM Chapter 17 to a netting set, derives residual claims and explains the gap between continuous idealisation and actual margin timing.
Learning objectives. By the end of this note you should be able to:
- interpret signed cash collateral and threshold rules;
- compute each party's residual exposure under the full-return convention;
- distinguish collateral held immediately before default from close-out value;
- identify the assumptions needed for perfect collateralisation.
In this lesson
- Fix the ownership and return convention
- A threshold strategy
- Residual losses at first default
- When complete collateral really removes the adjustment
- Implement the chronology
- Report mitigation and residual model risk
Before you start
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