The opposite signs of MTM is due to fact that each party owes some amount to another. Say A & B, where A defaults. A owed 20 to B and B owed 10 to A. Then MTM values for B are +20 and -10.
If correlation is high, then both MTM values will go up/down together. And thus Net value (+10 here) will move together. But, if correlation is low then one MTM moves up/down and other moves down/up. Say +20 gets to +21 and -10 gets to -9. Then the net value increases from +10 to +12. Which kind of exaggerates the net value in case of default.
I could not understand how low correlation benefits netting in the way it does in diversification.
If correlation is high, then both MTM values will go up/down together. And thus Net value (+10 here) will move together. But, if correlation is low then one MTM moves up/down and other moves down/up. Say +20 gets to +21 and -10 gets to -9. Then the net value increases from +10 to +12. Which kind of exaggerates the net value in case of default.
I could not understand how low correlation benefits netting in the way it does in diversification.