FRM Part II · FRM Exam Part II · Credit Risk
A bank has a portfolio of uncollateralized derivatives with a single counterparty under a legally enforceable netting agreement. Trade A has a mark-to-market value of +12 million and Trade B has a mark-to-market value of -7 million. What is the bank's current credit exposure to this counterparty?
The current exposure is 5 million. Under an enforceable netting agreement the trade values are offset (12 minus 7), giving a positive net value of 5 million, which is what the bank would lose if the counterparty defaulted today with zero recovery.
- A5 millionCorrect
- B12 million
- C7 million
- D19 million
Explanation
With enforceable netting, positions are offset: 12 - 7 = 5 million, and exposure is max(5, 0) = 5 million. Using 12 million ignores netting and treats only the positive trade as exposure. Using 19 million adds absolute values, which is wrong. Using 7 million takes the negative trade, which is not an exposure.
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