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The clearing house in a futures exchange helps eliminate: a. the risk of crop failure b. the...

Question:

The clearing house in a futures exchange helps eliminate:

a. the risk of crop failure

b. the risk of poor crop prices

c. credit risk

d. liquidity risk

e. inside trading

Clearing House:

A clearinghouse is a part of the exchange that acts as an intermediary between buyers and sellers by settling the trades. For a futures exchange, it also takes care of the margin account and other responsibilities.

Answer and Explanation:

The clearinghouse in a futures exchange helps eliminate:

c. credit risk

The clearinghouse collects margin and is responsible for the trade completion. Hence, it eliminates credit risk by pooling in the risk.


Let's analyze other options:

a. the risk of crop failure - It is dependent on the asset and not the clearinghouse.

b. the risk of poor crop prices - Again, dependent on asset and market forces.

d. liquidity risk - A clearing house also eliminates liquidity risk but credit risk is a better option as liquidity risk can be eliminated by even broker if he can have large number of securities.

e. inside trading - This cannot be eliminated by the clearinghouse and is difficult to eliminate.


Learn more about this topic:

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Investment Risks: Definition & Types

from Finance 305: Risk Management

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