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FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond

A bank and a counterparty have a netting set with a current mark-to-market of +30 million to the bank. The credit support annex has a threshold of 10 million to the counterparty, a minimum transfer amount of 1 million, and no independent amount. Collateral already held is 12 million, and the call is made on the current value with no delay. What additional collateral must the counterparty post?

The counterparty must post an additional 8 million. Required collateral equals the 30 million exposure less the 10 million threshold, or 20 million. The bank already holds 12 million, so the shortfall is 8 million, which is above the 1 million minimum transfer amount.

  1. A8 millionCorrect
  2. B18 million
  3. C20 million
  4. D6 million

Explanation

Required collateral = exposure minus threshold = 30 - 10 = 20 million. Collateral already held is 12 million, so the call is 20 - 12 = 8 million, which exceeds the 1 million minimum transfer. Calling 18 million ignores the existing collateral against the exposure net of nothing; 20 million ignores holdings.

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