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FRM Part II · FRM Exam Part II · Future Value and Exposure

A bank has a single netting set with a counterparty containing two uncollateralised derivatives. Trade A has a current mark-to-market of +12 million and Trade B has a current mark-to-market of -5 million. Under a legally enforceable close-out netting agreement, what is the bank's current exposure to the counterparty?

The current exposure is 7 million. Enforceable close-out netting allows the bank to offset the 12 million gain against the 5 million loss, producing a single net claim of 7 million. Without netting, the exposure would be the 12 million positive value alone.

  1. A7 millionCorrect
  2. B12 million
  3. C5 million
  4. D17 million

Explanation

With enforceable close-out netting, the positive and negative values are summed: 12 - 5 = 7 million. Without netting the exposure would be 12 million (only positive values counted), which is the key distractor. 17 million adds absolute values, and 5 million uses the negative trade.

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