Which of the following are considered asset based credit enhancements?

Which of the following are considered asset based credit enhancements?

I. Collateral

II. Credit default swaps

III. Close out netting arrangements

IV. Cash reserves
A . II and IV
B . I, II and IV
C . I and IV
D . I and III

Answer: D

Explanation:

Credit enhancements come in two varieties: counterparty based, where the exercise of the credit enhancement requires a third party to pay, and this includes guarantees and CDS contracts. Asset based credit enhancements are based upon a physical asset in possession, and these include collateral and balances owed on other trades or transactions, and availed through close out netting arrangements.

Of the listed choices, I and III are asset based credit enhancements, and II is third party based. Cash reserves are not credit enhancements (unless held as collateral).