Skip to content

FRM Part II · FRM Exam Part II · Future Value and Exposure

A bank computes exposures for a counterparty at the 1-year horizon. Under a netting agreement, the portfolio value V is normal with mean USD 5 million and standard deviation USD 10 million. The 97.5% PFE is the 97.5th percentile of exposure max(V,0). Using z = 1.96 at 97.5%, and ignoring any collateral, what is the PFE and how does it compare to the PFE for the same portfolio if its mean were zero?

The 97.5% PFE is the mean plus 1.96 standard deviations: 5 + 19.6 = USD 24.6 million. With a zero mean it would be 19.6 million, so the positive mean raises PFE by USD 5 million.

  1. AUSD 24.6 million, which is USD 5 million higher than the zero-mean caseCorrect
  2. BUSD 14.6 million, which is USD 5 million lower than the zero-mean case
  3. CUSD 24.6 million, which is USD 5 million lower than the zero-mean case
  4. DUSD 19.6 million, equal to the zero-mean case

Explanation

The 97.5th percentile of V is 5 + 1.96×10 = 24.6 million, positive, so PFE equals 24.6. With zero mean it is 19.6, so the mean shift raises PFE by 5 million. Option 1 subtracts the mean, a sign error.

Did you get it right without looking?

One question tells you little. A timed set on Future Value and Exposure shows your real accuracy, how long you take and where you lose marks.

Practise Future Value and ExposureFree diagnostic mock

More Future Value and Exposure questions