Impact of Netting on Exposure

[Priyanka_Chandak23]

Why will the netting benefit be the greatest when a party enters into a trade with positive initial MtM and negative correlation?
Can someone please explain the link between the two?
Thanks a lot in advance.

 

[bpdulog]

Let's say we have 2 contracts worth 5

If correlation = 1 and contract 1 goes up by 5, contract 2 goes up by 5

If correlation = -1 and contract 1 goes up by 5, contract 2 goes up by 5


So with full correlation you are exchanging like amounts so there's minimal counterparty risk. With negative correlation, the position values get wider so there is more counterparty risk and greater benefit from netting

 

[Priyanka_Chandak23]

Thanks, however you mean to say that with negative correlation the contract 2 would go down by 5,right ?
Also, starting with Initial +ve MtM will be more beneficial , could you explain that part too?

 

[bpdulog]

Thanks, however you mean to say that with negative correlation the contract 2 would go down by 5,right ?
Also, starting with Initial +ve MtM will be more beneficial , could you explain that part too?

Yeah my bad I meant to go down by 5

I don't think the +ve initial MTM matters as much