Question
In cases when a contract has funded and unfunded credit protection, should any of them take precedence over the other? For example, a contract with an exposure of 100, a funded credit protection of 50 and unfunded of 70. If there is no preference, the sum of credit protections is more than exposure, but if funded credit protection takes precedence over unfunded, the result is the next: funded credit protection of 50, 35 unfunded (70% of 50) and 15 without credit protection. In the last case, the sum is the exposure. How should we treat these guarantees?
Background on the question
Treatment of contracts with funded and unfunded credit protection.
Answer
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