FRM Part II · FRM Exam Part II · Derivatives
A bank has a netting set with a counterparty with a current mark-to-market of +USD 40 million to the bank. Under the credit support annex, the counterparty has posted USD 25 million of cash collateral, and the bank has posted no collateral. The CSA has no threshold and no independent amount. Ignoring margin period of risk, what is the bank's collateralised exposure?
The collateralised exposure is USD 15 million. Exposure equals the mark-to-market value of USD 40 million minus the USD 25 million of cash collateral held, since the collateral can be applied against the claim on default. Using USD 40 million ignores the collateral, and adding it is a sign error.
- AUSD 65 million
- BUSD 25 million
- CUSD 40 million
- DUSD 15 millionCorrect
Explanation
Collateralised exposure = max(V - C, 0) = 40 - 25 = 15. Ignoring collateral gives 40. Adding the collateral (65) wrongly adds instead of subtracts.
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