A collateral agreement has a threshold of Rs 5 crore, a minimum transfer of Rs 50 lakh and rounding to Rs 10 lakh. The amount owed to the bank over five days is Rs 3.2, 5.8, 6.1, 9.4 and 7.0 crore. What collateral is called or returned each day?

Nothing on day one, a Rs 0.8 crore call on day two, nothing on day three, a Rs 3.6 crore call on day four and a Rs 2.4 crore return on day five. Each day, required collateral is the amount owed less the Rs 5 crore threshold, floored at zero. The transfer is required less held, made only if it is at least Rs 50 lakh. Uncollateralised exposure stays at about the threshold, rising to Rs 5.3 crore on day three because of the minimum.

Picture a landlord who lets a tenant run up to one month's rent in arrears before asking for anything, never sends a bill for less than a few hundred rupees, and rounds every bill to the nearest hundred. The thresholdThe amount of exposure one side agrees to carry unsecured before the other must post collateral. is unsecured credit the bank is willing to extend; the minimum transfer stops collateral moving back and forth for small amounts; rounding keeps the payments clean. Each one leaves the bank with a little more exposure than the bare mark-to-market would suggest, and each one is a deliberate trade of risk for operational sense.

Use the same three steps every day. Required is the amount owed less 5, never below zero. Compare it with what is held. Move the difference only if it is at least 0.5, rounding a call up and a return down to the nearest 0.1. Day one: 3.2 is under the threshold, nothing is required. Day two: required 0.8, held 0, call 0.8. Day three: required 1.1, held 0.8, shortfall 0.3, under the minimum, nothing moves. Day four: required 4.4, held 0.8, call 3.6; day five: required 2.0, held 4.4, return 2.4. Rounding never bites here because the amounts already fall on Rs 10 lakh; had day two's amount owed been 5.83, the 0.83 shortfall would have been called as 0.9.

Look at the last column. After each day's transfer the unsecured amount is 3.2, 5.0, 5.3, 5.0 and 5.0 crore. The threshold sets the floor of the bank's unsecured risk, and the minimum transfer can push it above that floor by up to Rs 50 lakh. There is a third, hidden piece: a call made today is usually settled the next business day or later, and if the client defaults in between, the bank has the exposure of a further move during that gap. That is why credit teams size the threshold, the minimum and the settlement lag together rather than one at a time.

A sharper answer adds the direction of the agreement. If the client were owed money, the same mechanics would run in reverse and the bank would be the one posting. Many agreements set different thresholds for the two sides, often zero for the stronger party. The limit of this exercise is that it treats the mark-to-market as agreed; in practice the two sides can dispute the valuation, and a disputed call delays collateral exactly when markets are moving most.