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What Measures Can Institutions Take to Identify and Mitigate Wrong-Way Risk?

Identify via stress testing; mitigate by avoiding correlated collateral, applying higher haircuts, and setting strict exposure limits.
Greeks.Live15.11.25

What Measures Can Institutions Take to Identify and Mitigate Wrong-Way Risk?

Institutions can identify wrong-way risk through comprehensive stress testing that specifically models scenarios where collateral value and counterparty credit quality deteriorate simultaneously. Mitigation measures include avoiding collateral highly correlated with the counterparty's creditworthiness, applying higher haircuts to suspect collateral, and setting strict limits on exposures that exhibit wrong-way risk.

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