FRM Part II · FRM Exam Part II · Fundamentals of Credit Risk
A bank has a derivative portfolio with a counterparty comprising three trades with values to the bank of +USD 30 million, +USD 10 million and -USD 25 million. The counterparty has posted USD 8 million of cash collateral. Netting is enforceable and the collateral is covered by the netting agreement. What is the bank's uncollateralized exposure?
The uncollateralized exposure is USD 7 million. Netting the trades gives 30 plus 10 minus 25, or USD 15 million, and the USD 8 million of cash collateral then reduces the remaining claim to USD 7 million.
- AUSD 7 millionCorrect
- BUSD 15 million
- CUSD 32 million
- DUSD 40 million
Explanation
Net value = 30 + 10 - 25 = USD 15 million. Subtracting cash collateral of USD 8 million gives USD 7 million. USD 15 million ignores collateral; USD 32 million is 40 - 8 without netting; USD 40 million is gross positive exposure.
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