FRM Part II · FRM Exam Part II · Netting, Close-out and Related Aspects
A bank has a bilateral ISDA with Counterparty X covering three trades with mark-to-market values of +40 million, -25 million and +10 million to the bank (USD). Counterparty X defaults and close-out netting is legally enforceable. No collateral is held. Ignoring recoveries, what is the bank's exposure after close-out?
With enforceable close-out netting, the bank nets all values: 40 plus 10 minus 25 gives a net claim of USD 25 million. Adding only the positive-value trades to get 50 million ignores netting and overstates the exposure.
- AUSD 50 millionCorrect
- BUSD 25 million
- CUSD 75 million
- DUSD 0
Explanation
Net = 40 - 25 + 10 = 25 million?? Recalculate: 40 + 10 = 50, minus 25 = 25. The net claim is therefore USD 25 million; summing only the positive trades (50 million) ignores netting.
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