Reading 37: Risk Management －LOS k

Marking to market is the best answer. This reduces potential credit risk by converting what would otherwise be potential credit risk to current credit risk. The credit risk becomes current insofar as the counterparty is required to provide additional collateral immediately (rather than in the future).

Netting is the process of consolidating the exposures between two parties to a single net exposure that one party bears. Marking to market would not apply to a case where two parties have obligations to each other.

Special purpose vehicles are subsidiaries set up by a parent company to engage in certain transactions. Generally, they are separate from the parent organization and not liable for the debt of the parent company. They are capitalized in a way that results in a high credit rating, and can, therefore, engage in transactions that the parent cannot.