i.

Funded credit protection

a. Collateral
Collateral is an asset that serves as security against counter party risk. Anderson and
Joeveer(2014)
A collateralized transaction is a transaction where the credit exposure or potential credit
exposure of the credit institution to a counterparty is hedged in whole or in part by
collateral posted by the counterparty or by a third party on behalf of the counterparty.
Basel (2004)
Collateralized credit exposures must have a risk biased exposure amount less than the
same credit exposure without credit protection. The collateral can be in the form of real
estate, receivable and other form of physical collateral. Dohnal (2008)

b. On-balance sheet netting

According to Basel (2004) Banks where legally enforceable netting arrangement for
loans and deposits they may calculate capital requirement on the bases of net credit
exposure. The claim between the credit institution and counter party may be recognized.
They also indicated that Master netting agreements covering repurchase transactions
and/or securities or commodities lending or borrowing transactions and/or other capital
market driven transactions.

ii. Unfunded credit protection

The amount that the safety provider has carried out to pay in the event of the default or
non-payment of the borrower or on the event of other specified credit situation is the
value of unfunded credit protection. where the amount that the protection provider has
carry out to pay is not higher than the exposure value, the value of the credit protection
shall be reduced by 40%; where the amount that the protection provider has carry out to
pay is higher than the exposure value, the value of the credit protection shall be no higher
than 60% of the exposure value Basel (2004)

a. Guarantees
A guarantee must represent a direct claim on the guarantor with the extent of the cover
being clearly defined and unquestionable. A guarantee must be irrevocable; there must be