Which of the following statements about the positions of the clearinghouse is CORRECT? The clearinghouse:
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A. B. C. D.Explanation
The correct answer is A. The clearinghouse takes no position.
In financial markets, a clearinghouse serves as an intermediary between buyers and sellers of financial instruments. Its primary role is to facilitate the settlement of trades and manage counterparty risk.
To understand the statement, let's briefly explain the concept of positions in this context:
Long position: When an investor takes a long position, it means they own a financial instrument (such as a stock or a bond) and expect its value to increase over time. They profit from a price increase.
Short position: Conversely, when an investor takes a short position, it means they sell a financial instrument they don't own, expecting its value to decrease. They profit from a price decline by buying it back at a lower price.
The clearinghouse's role is to ensure the smooth settlement of trades and reduce counterparty risk. It does this by acting as a central counterparty for all trades. When a buyer and seller agree to a trade, the clearinghouse becomes the buyer to the seller and the seller to the buyer, guaranteeing the performance of the trade.
In this context, the clearinghouse does not take a position in the transaction. It is a neutral entity that facilitates the exchange between buyers and sellers but does not become a party to the trade itself. It does not take a long or short position.
Therefore, the correct answer is A. The clearinghouse takes no position.