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FRM Part II · FRM Exam Part II · The Evolution of Stress Testing Counterparty Exposures

A bank has a single netting set with a counterparty containing two trades. In a stress scenario, Trade A has a mark-to-market of +USD 80 million to the bank and Trade B has a mark-to-market of -USD 50 million. The agreement has legally enforceable close-out netting. The bank holds USD 10 million of collateral and the counterparty has no threshold or minimum transfer amount issues. What is the stressed current exposure after netting and collateral?

The stressed exposure is USD 20 million. Close-out netting offsets the two trades to a net value of USD 30 million owed to the bank, and the USD 10 million of collateral held reduces that to USD 20 million. Ignoring netting or collateral would overstate the exposure.

  1. AUSD 20 millionCorrect
  2. BUSD 30 million
  3. CUSD 70 million
  4. DUSD 80 million

Explanation

Net MtM = 80 - 50 = 30 million. Subtracting collateral of 10 million gives 20 million exposure. Option B ignores collateral. Option C wrongly subtracts collateral from the gross positive trade only, then ignores netting. Option D ignores both.

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