FRM Part I · FRM Exam Part I · Measuring Credit Risk
A bank has a derivative exposure of USD 8 million to a counterparty and a separate exposure of negative USD 5 million (owed to the counterparty) under the same legally enforceable netting agreement. Without netting, the bank's credit exposure is the sum of positive values only. What is the reduction in credit exposure due to netting?
Without netting the exposure is USD 8 million, because the negative position adds nothing. With netting it is USD 3 million (8 minus 5). The reduction is therefore USD 5 million; the USD 3 million figure is the remaining net exposure.
- AUSD 3 million
- BUSD 5 millionCorrect
- CUSD 8 million
- DUSD 0
Explanation
Without netting, exposure is max(8,0) + max(-5,0) = USD 8 million. With netting, exposure is max(8 - 5, 0) = USD 3 million. The reduction is 8 - 3 = USD 5 million. USD 3 million is the net exposure, not the reduction.
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