Explain how off-balance-sheet market contracts, or derivative instruments, differ from contingent guaranty contracts.

a. What is counterparty credit risk?

b. Why do exchange-traded derivative security contracts have no capital requirements?

c. What is the difference between the potential exposure and the current exposure of over-the-counter derivative contracts?

d. Why are the credit conversion factors for the potential exposure of foreign exchange contracts greater than they are for interest rate contracts?

e. Why do regulators not allow DIs to benefit from positive current exposure values?

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