Collateral

Assets pledged to secure an obligation, which the lender may keep or sell if the borrower defaults. It reduces loss given default.

Where you will meet it

Collateral comes up in 110 learning outcome notes across the FRM syllabus. A few of them:

• Introduction to Derivatives
  FRM Part I · Financial markets and products

  “It is largest in OTC trades and is reduced by clearing, netting and collateral.”

• Credit Risk Transfer Mechanisms
  FRM Part I · Foundations of risk management

  “Collateral and margin reduce the amount lost if a counterparty fails.”

• External and Internal Credit Ratings
  FRM Part I · Valuation and risk models

  “It depends on seniority, collateral and the state of the economy, and it is often estimated from the bond price a month or so after default.”

• Fundamentals of Credit Risk
  FRM Part II · Credit risk measurement and management

  “Netting and collateral reduce it.”

See also

Loss given default

All terms beginning with C · FRM glossary

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