Collateral can increase exposure?

[Arka Bose]

Gregory has given a scenario where he says Portfolio value is -15 and collateral value is -18. Thus benefit with collateral is -3. (BT notes, Gregory Chapter 8, Pg 72)

He says thus, in this scenario, collateral can increase exposure.

My question is why should i look at the value of collateral when my max exposure should be capped at the portfolio value itself?

 

[David Harper CFA FRM]

I think Gregory is just illustrating an outlier possibility related to "the need to post collateral and parameters such as minimum transfer amounts create some risk above the threshold." The portfolio value -15 implies this party has posted collateral but the collateral amount is not continously accurate (per MTA and other parameters) such that $18 has actually been posted and $3 is due to be returned, but has not been returned yet, so this party is underwater yet exposed on the $3 owed. Thanks,